Novated leasing has become an increasingly popular option for Australian looking to finance a new vehicle, especially with the rise of EVs.
But is it the right choice for everyone?
In this guide, we’ll explore the 7 pros and cons of a novated lease to help you decide if it’s worth it for your next vehicle purchase.
The Pros of a Novated Lease
1. Significant Tax Savings
One of the biggest advantages of a novated lease is the potential for tax savings. Because your lease payments are deducted from your pre-tax salary, it reduces your taxable income and you pay less income tax. For middle to high-income earners, this can lead to substantial savings over the lease term.
For example, if you earn $140,000 per year and your lease payments amount to $12,000 annually, your taxable income drops to $128,000. You not only have lower income on paper, but you push yourself into a lower tax bracket with your novated lease! Even more savings at tax time!
2. Convenient Payment Structure
With a novated lease, all your vehicle-related expenses are bundled into one monthly payment. This includes:
- Registration.
- Insurance.
- Maintenance.
- Charging or fuel costs.
This bundled approach makes it easier to budget and simplifies the financial side of owning a car. Plus, because these costs are paid with pre-tax dollars, you can further maximise your savings.
3. GST Savings
Another key benefit of novated leasing is the GST savings. You don’t have to pay GST on the purchase price of the vehicle or on running costs like maintenance and insurance. This can save you close to 10% on the total cost of the vehicle.
4. Fringe Benefits Tax (FBT) Exemption for EVs
For those leasing electric vehicles, recent changes in Australian tax laws mean that EVs below the luxury car tax threshold (currently $91,387 for 2024-2025) are exempt from Fringe Benefits Tax (FBT). This further enhances the tax savings for both you and your employer, making novated leasing an attractive option for EV drivers.
5. Flexibility to Upgrade Regularly
A novated lease gives you the flexibility to upgrade to a new vehicle at the end of the lease term, typically every two to five years. With the rapid advancements in car technology, this is particularly advantageous for drivers who want to stay on the cutting edge without the hassle of long-term ownership or the burden of depreciation.
6. Reduced Financial Burden
Because a novated lease eliminates the need for a large upfront payment or deposit, it makes getting a new vehicle more financially manageable. You also avoid the long-term financial commitment associated with car loans or outright purchases.
7. Portability
One of the underrated benefits of a novated lease is its portability. If you change jobs, your novated lease can move with you, provided your new employer supports salary packaging.
This portability makes novated leasing more flexible than other financing options, especially for employees who may switch roles or companies. Your novated lease consultant can help you move your lease to your new employer so make sure you reach out to them if you have any issues.
The Cons of a Novated Lease
1. You Don’t Own the Car
While a novated lease offers plenty of flexibility, you don’t actually own the car during the lease term. At the end of the lease, you typically have three options:
- Pay the residual value to own the car.
- Extend the lease on the same vehicle.
- Sell the vehicle.
- Upgrade to a new model.
If owning the vehicle outright is important to you, a novated lease might not be the best fit.
2. Limited kms
Most novated leases come with km limits, which can be an issue for drivers who rack up high kms. If you exceed the agreed-upon km limit, you may be charged extra fees at the end of the lease. It’s important to choose a lease that fits your driving habits to avoid these additional costs.
3. Long-Term Cost
While novated leasing offers excellent tax benefits, it may not always be the cheapest option in the long run. Over time, lease payments can add up, and depending on the interest rates and lease terms, it might cost more than purchasing a car outright—especially if you plan to keep the vehicle for a long period of time. However, this does not apply to EVs. An EV novated lease will nearly always be more cost effective because of the FBT exemption.
4. Job Dependency
Your novated lease is tied to your employment. If you change jobs and your new employer doesn’t support salary packaging, or if you lose your job, managing the lease can become more complicated. In some cases, you may have to terminate the lease early, which can incur penalties.
5. Residual Value Risk
At the end of your lease, if you choose to buy the vehicle, you’ll need to pay the residual value —the agreed-upon amount left at the end of the lease term.
This residual value may sometimes be higher than the vehicle’s market value, depending on depreciation and the state of the used car market, which could leave you paying more than the car is worth.
This outcome is rare, your consultant will reach out to you beforehand to find a solution if it looks like this may be the case for your lease.
Is a Novated Lease Worth It?
Ultimately, whether a novated lease is worth it depends on your personal circumstances and financial goals. If you’re looking to maximise tax savings, enjoy a convenient payment structure, and regularly upgrade to new vehicles, a novated lease can be an excellent option. However, if long-term ownership, unlimited kms, or having full control over the car is more important to you, traditional car financing might be a better fit.
Leasing through CarBon Novated Leasing offers a range of benefits, especially for those interested in electric vehicles. The GST savings, FBT exemption for EVs, and tax advantages make it a smart choice for many Australian drivers.
