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What is a novated lease and is it worth it? What are the pros and cons?

In the vast landscape of automotive finance, getting a novated lease has emerged as a compelling avenue for drivers in Australia seeking a unique and tax-effective way to get behind the wheel of their dream car.

It’s a financial dance that combines the joys of car ownership with the practicality of tax savings and peace of mind of covered servicing costs.

What is a novated lease?

Novated leasing is a financial arrangement between an employer, an employee, and a leasing company. It allows employees to finance a vehicle of their choice through a salary packaging arrangement with their employer.

The monthly lease payments, along with running costs like fuel, maintenance, and insurance, are deducted from the employee’s pre-tax salary. Essentially, it brings down your taxable income so at tax time, theoretically, you might not pay as much throughout that financial year.

2023 Hyundai i30 Sedan N at dealership

What are the advantages of a novated lease?

1. Tax savings: One of the primary attractions of novated leasing is the potential for significant tax savings. As lease payments and running costs are deducted from pre-tax income, it can lead to a substantial reduction in taxable income, ultimately putting more money back into the employee’s (your) pocket.

2. Variety: Unlike traditional company cars, novated leasing allows employees to choose the car that suits their lifestyle and preferences. Whether it’s a sleek sports car or a family-friendly SUV, the options are as diverse as the Australian automotive industry.

3. Maintenance covered: Routine maintenance and repairs become more manageable with novated leasing, as these costs can be included in the lease agreement. This means fewer financial surprises and a smoother ride for overall ownership.

4. Fuel savings: Fuel costs are a significant part of vehicle ownership, and novated leasing can ease this burden by allowing employees to pay for fuel using pre-tax dollars. It’s a small tweak that makes a big difference over time.

5. Roadside assistance: Many novated leasing packages, such as those from our friends over at Novated Lease Australia, can include roadside assistance as part of the deal, providing an extra layer of security and peace of mind for drivers.

6. No distance requirements: There is usually no restrictions or minimum distance requirement that you need to drive per year to consider a novated lease. As with pretty much every element listed here, it’s best to talk with your preferred leasing company to see what sort of terms it runs and what coverage you have.

What are the disadvantages of a novated lease?

1. Secure employment: The beauty of novated leasing lies in its tie to employment. If a driver changes jobs or is sacked or made redundant, they may lose the novated lease benefits, and the responsibility for lease payments may revert over to you. In some circumstances, the lease can roll over into a car loan with the usual interest attached and so on.

2. Residual value: At the end of the lease term, the driver faces a decision regarding the vehicle’s residual value. Depending on the lease agreement, they may have the option to purchase the vehicle or trade it in for a new one. However, the uncertainty of the vehicle’s future value can be a source of stress for some drivers. You may have to pay GST on the residual as well.

3. Fuel company: You may have to stick with a particular fuel company as part of your leasing package to obtain fuel under the deal. You can of course fill up with whatever fuel you like, such as if you’re in a remote location, but it might not be covered by the lease; you may have to pay for it like normal.

4. No early buy-out: Unlike a conventional car loan where you can pay off the remainder of a loan, pretty much at any point of the loan term, there isn’t really an opportunity to ‘pay off’ a novated term and acquire the vehicle. You’ll need to wait for the lease term length. In most cases anyway.

Making the decision

As with any financial decision, the choice to embark on a novated lease journey should be approached with careful consideration. Drivers should evaluate their individual circumstances, driving habits, and career stability before committing to a financial arrangement.

For those seeking a balance between financial efficiency and automotive desire, novated leasing can be a game-changer. The thrill of driving a new, personally-selected vehicle, coupled with potential tax savings and reduced ownership costs, creates a road map that many find appealing.

If it turns out a novated lease is not for you, try comparing car loans with our friends over at Money.com.au.

Brett Davis

Brett started out as a motor mechanic but eventually became frustrated working on cars that weren't his. He then earned a degree in journalism and scored a job at Top Gear Australia back in 2008, and then worked at Zoom/Extreme Performance magazines, CarAdvice, and started PerformanceDrive/PDriveTV in 2011 with Josh Bennis, and ran it for 12 years. He's now the owner and managing editor here at Driving Enthusiast.

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