Compare Novated Leases

Novated leases are growing in popularity in Australia as a tax-friendly way of buying a car. According to the National Automotive Leasing and Salary Packaging Association (NALSPA), there are around 350,000 novated leases in Australia as of September 2024. It’s easy to see why: spacing out the cost of your purchase and reducing your taxable income in the process sounds pretty attractive. Find out more about how they work and whether they’re right for you before you decide on your next car purchase. 

What is a novated lease?

A novated lease is a salary sacrificing or salary packaging agreement between you, your employer and a novated lease provider. Here’s a quick rundown of how it works:

1. Your novated lease provider purchases your car and leases it to your employer, who then gives you access even if it’s only for private use
2. Your employer covers your lease obligations by deducting them from your pre-tax salary
3. Your payments are made until the end of your lease term (up to five years), at which point you can decide between several different options

The main reason why most people choose novated leases is what happens in step #2: pre-tax salary deductions. By taking the payment from your payslip before it’s sent to you, your taxable income is reduced, which in turn lowers the tax you’re required to pay. As an added bonus, you can also save on GST.

What happens at the end of a novated lease?

All novated leases come with a residual value or payment. This is a lump sum that’s intended to represent the value of your car at the conclusion of the lease. You’ll be able to select one of the following choices:

• Pay the residual out of pocket and take ownership of the car outright
• Trade in or sell the car to cover the residual and end the lease (and potentially start a new one)
• Refinance the residual and extend the lease

The Australian Taxation Office (ATO) has set minimum required residual values for each lease term length, which are as follows:

Lease term	Minimum residual value %
12 months	65.63%
24 months	56.25%
36 months	46.88%
48 months	37.50%
60 months	28.13%

What are the different types of novated lease?

The two main types of novated leases are fully maintained and non-maintained leases. It’s important to understand the differences between these two arrangements, which are as follows:

Fully maintained novated leases

Fully maintained novated leases incorporate a range of on-road and ongoing maintenance costs into your payments. These can include:

• Comprehensive car insurance
• CTP insurance
• Petrol or charging costs
• Repair and servicing costs
• Vehicle registration

The cost of each of these will be determined in part by an estimate of the kilometres driven per year.

The main benefit of fully maintained leases is that the cost of all the included extras comes out of your pre-tax salary, rather than post-tax. This means they can save you more money, as well as have GST claimable on these costs. It also saves time, as you don’t have to organise them yourself or access your savings.

When you take out your novated lease through Savvy, we offer customised solutions if you want to pick and choose what to include in your package. For example, we can offer a fully maintained novated lease without car insurance included.

Non-maintained novated leases

In contrast, non-maintained novated lease payments only include the cost of your vehicle and the fees and interest associated with your lease. This means you’re responsible for arranging all the servicing, car insurance and everything else that would’ve otherwise been included in your agreement.

You’ll also have to pay for these out of your post-tax income, meaning you won’t enjoy the same tax benefits as you would under a fully maintained lease. Additionally, drawing up budgets for on-road costs and negotiating the terms of your agreement yourself can take up more time.

What other costs are involved in a novated lease?

Several factors contribute to the overall cost of your novated lease:

• Interest: much like a car loan, interest is applied to your novated lease payments. It accounts for factors such as the amount borrowed, administrative expenses and the risk associated with leasing to the borrower.
• Finance and admin fees: these are charges associated with setting up and managing the lease.
• Choice of vehicle: the make, model and specifications of the car you choose will impact the overall cost.
• Post tax contributions: most cars are subject to fringe benefits tax (FBT), which is required to be offset through post tax contributions. However, electric vehicles are exempt from FBT, which can result in lower costs compared to traditional petrol or diesel cars.
• Driving distance: your annual mileage affects running costs, which can influence lease price or tax savings and the overall effectiveness of the lease.
• Car insurance: the cost of car insurance can vary based on factors like your driving history and the type of coverage. Comprehensive car insurance is required, and you can either include your own or opt for Savvy Fleet Insurance, which is specifically designed for novated leases (eligibility criteria apply).

Leasing a vehicle can provide substantial cost savings for both personal and business use. However, it’s important to understand all the potential costs involved. Since lease agreements and individual financial situations can vary greatly, it’s best to speak with an expert who can offer a tailored example based on your specific circumstances.

Novated lease tax benefits

One of the big advantages of novated leases is the tax benefits they offer. Here’s what you can expect from your novated lease:

• Income tax: as mentioned, because lease payments come out of pre-tax income, the amount of income tax you’re liable to pay is reduced. This is despite the fact that you’re earning the same amount.
• GST on purchase: the GST on the purchase of the vehicle can be claimed by your leasing company, which can pass the savings of potentially thousands of dollars on to you.
• GST on running costs: it isn’t just the car purchase that you can avoid GST on. Insurance, registration, maintenance and fuel can all be GST-free, in addition to the ability to pay for them out of your pre-tax income (in the case of fully maintained novated leases).

You can see the potential cost savings with a novated lease in the table below:

Novated leases and fringe benefits tax (FBT)

One potential cost to consider when leasing your car is FBT. It’s a tax that applies to fringe benefits provided to employees by their business outside of their traditional salary. Novated leases are a common example of a fringe benefit, but they can also include health insurance and travel or accommodation allowances. 

While this tax is charged to employers, this is often passed on to the employee. As of the 2024-25 FBT year, this is charged at a rate of 47% on the taxable portion of the benefit (equivalent to 45% plus the 2% Medicare Levy).

However, by making post-tax contributions to your car’s running costs, FBT is reduced to $0, which is why businesses allow employees to access the benefits of novated leasing. Each of the costs listed under the fully maintained lease section (as well as new tyres) can be paid for out of your post-tax income to cut down on your FBT liability. You don’t need to worry, though: your novated leasing provider works all this out for you.

The amount you contribute post-tax can be calculated in one of the following two ways:

1. Statutory formula: a flat 20% rate on the cost of all car fringe benefits.
2. Operating costs: in cases where cars are used largely for business purposes, any private use is calculated as an overall percentage and applied to pre-tax expenses (inclusive of GST). A logbook is required to track business and private use.

The following is an example of how FBT may look if not using either method:

Cost of car	$50,000
Statutory formula	20%
Taxable portion	$10,000
Grossed-up value (Type 1 @ 2.0802)	$20,802
FBT payable	$9,776

Here’s how the above example would look using the ECM:

Cost of car	$50,000
Statutory formula	20%
Taxable portion	$10,000
Post-tax contribution	$10,000
ECM per fortnight	$384
ECM over a year	$10,000
FBT payable	$0

How are novated leases different to car loans?

There are several key differences between novated leases and car loans. Perhaps the biggest are that car loans can be taken out by anyone, not just those whose employer offers them, and that they don’t offer any tax benefits (unless they’re used for business purposes). Car loans are an arrangement between only you and your lender and can be repaid over as many as seven years. 

Novated leases vs business car leases

Novated leases and commercial car leases are similar in principle, but there are several key differences. These include:

• Salary sacrificing: business leases don’t take advantage of salary sacrificing, as the car is leased to the business for business use.
• Usage: cars leased by a business must be used for business purposes at least 50% of the time.
• Tax benefits: as a business operating cost, you may be able to claim the full payment as a tax deduction if it’s used 100% for business purposes. Additionally, you may be able to claim a GST credit for any payments that include GST (though it’s important to speak with a tax professional if you’re unsure).
• Residual: business finance leases often come with a residual value, which works in the same way as they do on novated leases, but operating leases don’t.
• Running costs: business operating leases allow you to include your car’s on-road costs in your payments, but this isn’t the case for finance leases.
• Option to hand back your car: under a business operating lease, you can use the car for your specified term and hand it back afterwards, with obsolescence risk remaining with your lease provider.

How to arrange a novated lease with Savvy

1. Find your car

   You can start the process with us having already found your vehicle or, if you don't have your model locked in, we can help you find it for your lease.

2. Review your budget

   Using information such as the type of car you want to lease and how much you drive, we'll set a tailored budget which your employer will transfer to us each payroll.

3. Have your deductions set up

   Once your employer sets up your deductions, your payslip will show both pre-tax and post-tax deductions, depending on the type of car you're leasing and your budget. Pre-tax reduces your taxable income, while post-tax reduces your FBT liability.

4. Enjoy on-road costs being bundled into your payments

   Your everyday car expenses, such as fuel, registration, servicing, insurance and more are made from your pre-tax salary. Plus, you could save up to an additional 9.09% of your car's purchase price with a GST credit (as long as your employer is eligible).

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