Is novated leasing a good idea?

A novated lease can be an incredibly powerful tool for budgeting – it saves money on a car and reduces tax. However, like most things, to understand whether or not it’s worth it for you requires assessment of your own unique circumstances and goals. 

There are several considerations when getting a car – your lifestyle, financial means, job stability, practical needs, preferences and more. You could opt to get a car that costs almost as much as your annual salary, which certainly wouldn’t be wise if you’re buying outright. In fact, it’s probably not even a good idea on a novated lease, which lets you utilise your pre-tax salary. If instead you were to choose a more affordable car in relation to your salary, it would still be a huge outlay to pay for it up front out of savings, but a novated lease can make this really manageable for your budget.

So, ultimately choosing the right car for your situation is obviously step number one, whichever method of payment you choose. But can a novated lease actually improve your financial position, therefore making it worth it? Assessing the benefits is a big part of the equation.

Novated leases: benefits

Tapping into your pre-tax salary is really where novated leasing outshines any other method of finance. What does this mean? Well, with buying outright or a standard car loan, your employer pays your super and your tax from your gross salary, and then you pay for your car with what’s left. If instead you choose a novated lease, your employer makes payments towards your car from your salary before tax. Then you pay a much smaller amount of tax from the lower taxable income that remains. It’s accessing money that usually goes straight into the hands of the taxman.

And there are other ways a novated lease can save you money. You can read about the benefits of a novated lease in our in-depth article, but to summarise:

• You won’t pay GST (a 10% saving).

• You’ll get access to wholesale pricing, reducing your purchase price (a lot) .

• You can roll all of your running costs (rego, fuel, servicing, insurance, roadside assist) in the package to pay even less tax – meaning a single, smooth payment for your car and all costs.

• You’ll get a fuel card and servicing card that charges directly to your novated lease account for convenience – no money out of pocket.

• You get lots of options at the end of your lease and your car will usually be worth more than the balance remaining – so if you sell your car, you pocket the difference, tax free.

• You can buy a new car, buy a used car or bring your existing car.

As you can see, there are a lot of compelling advantages that a standard car loan and buying outright just can’t compete with. However, there are also some things to consider and, despite all the pluses, a novated lease might not be for everyone.

Novated leases: The considerations

Most importantly, to be eligible for a novated lease you need to be employed and paid via PAYG, and your employer needs to offer novated leasing. The former isn’t a problem for most people, who are employed and paid that way. And the latter is actually easier to overcome than you’d think, because it’s relatively effortless for employers to get set up (more about that in our employer guide). 

Another important thing to consider is that, if you do take on a novated lease, you will need to be able and willing to cover novated lease payments out of your own pocket if you leave or lose your job, until you find a new one. This is because a novated lease sits with the lessee and not the employer, which might sound obvious, but can trip some people up.  If you’d like to explore in more detail, check out our novated lease pros and cons article and be sure to also read ‘Is novated leasing right for me?’.

The bottom line

As with most things, it’s worth talking to experts in the space and asking lots of questions. When you’re booking a holiday, it can be a better use of time to chat to an experienced travel agent who’ll quickly take you through a lot of flight and accommodation options that fit well together, as opposed to trawling the internet and ending up down countless rabbit holes. Similarly, a financial advisor can be more expensive but infinitely more effective than visiting lots of marginally helpful forums online. In this way, talking to novated lease providers and quizzing them directly can be more effective than piecing together information from lots of online sources.