What is Novated lease?

Being in the market for a new car, you could consider certain finance options such as taking out a personal loan or drawing down on a mortgage. However, have you ever thought of a novated lease?

A novated lease is a form of salary packaging that assists you to finance a new, used, or even your existing car along with certain benefits like tax savings. In simple words, it can be said that in novated lease, your employer pays the lease of your car out of your salary with the combination of pre and post-tax salary deductions. With this, you may drive a car of your choice without being compromised with your lifestyle.

There is a misconception in the mind of people that novated lease is for only high flyers; however, it’s not true. Even on a modest salary, decreasing your taxable income means paying off less tax and you may spend that amount you save to grow your business that is the best method prescribed by accountancy practices.

Is novated leasing an efficient choice for you? Here’s our complete guide to assist you to make a wise decision:


The Australian Taxation Office (ATO) allows the employees to contribute towards the running costs of the leased vehicle in after-tax dollars. This is known as Employee Contribution Method or ECM.

This enables the employees to reduce their novated lease FBT with post-tax contributions. Tax agent Melbourne suggests that this is the most beneficial method to maximize small business tax benefits since it eliminates the requirement to pay FBT and enhances the tax effectiveness of the arrangement. The post-tax amount required to eliminate novated lease FBT is almost 20% of the GST inclusive price of your vehicle each year.

Top Reasons to consider novated lease

  • Tax Benefits

As you are making novated lease repayments before taxation, you are also decreasing the taxable income. You are also making your salary stretch further rather than making a repayment with what is left of your salary after the taxes, this way you save money each month.  You may take the advice of a tax return accounting firm related to this matter.

  • Fuel Savings

Running costs and fuel costs come directly out of the pre-tax salary. What does it imply?

Every month, you pay the same amount for your fuel, it doesn’t matter whether the cost of petrol of increases or decreases. The more amounts you’ll save when the price of fuel is higher. Your fuel card involves a fleet discount and since using pre-tax income, you pay for fuel, you won’t have to be worried about fluctuations in the fuel costs for the duration of a novated lease.

  • Good AND Services Tax (GST)

You don’t have to pay for the GST on the car when you have opted for a novated lease. It implies 10% savings on the purchase price of the car. To exemplify, if you have purchased a $40,000 car that is a saving of $4000!

  • Fixed Payments

Like running expenses and fuel costs, your repayment amount stays equal each month. During the initiation of the agreement, lease payments are fixed, and your employer pays them for you. You also don’t have to be worried about budgeting for car payments.

Your fleet provider handles your servicing requirements as well, therefore you must not be worried about the repair costs.

 Avoid Depreciation

Another top feature about the novated lease is that you must not be worried about depreciation. Sometimes as per your business structure, you are not committed to a vehicle for more than two to three years. You get assured with this; your vehicle comes with the latest safety and quality specifications.

You don’t have to be worried about selling your car and getting a fair value back, novated lease take care of this concern for you.

What are the Benefits of a Novated Lease?

Employee Benefits

  • Vehicle running expenses could be included

A completely maintained lease may also cover the running costs of a vehicle under similar pre-tax conditions.

  • Avoid risks of resale

The vehicle could be replaced with a new car anytime after few years.

  • No restrictions

You also have an option to choose the car you want and can use it for any purpose.

  • Less employees taxable income

It implies less income tax is paid each year.

  • Upfront purchase costs are reduced

No deposit fee is required and only leasing payment and a relevant fee is paid.

Employer Benefits

  • Enhanced Cash Flow

Low cash gets tied up in a depreciating fleet of vehicles.

  • Recruitment

An efficient way to lure employees with a high salary structure.

  • Retention

An employer must stay with the employer to keep up with the pre-tax advantages of a novated lease.

What are the drawbacks of Novated Lease?

Drawbacks for employees

  • You must remain an employee

When you leave your employer the novated part of the lease terminates but the employee stays still responsible for the ongoing lease until it could be transferred to another employer.

  • You don’t own a car

It implies you cannot make the major alterations and the car should be in a good condition to return at the end of the phase and to maintain its residual value.

  • Fringe Benefits Tax

A novated lease is a benefit for an employee and may incur fringe benefits tax in certain cases.

Drawbacks for Employer

  • Administration

Distributing the employee salary payments between employer and a leasing company needs more overheads to administer.

Is a novated lease right for you?

Novated lease could be an excellent option for you if your employer is willing and happy to allow you salary package your lease. While talking about budgeting for your car expenses, a novated lease could be of great assistance. You could also be taking advantage of tax benefits that may make your business planning more successful.

A novated lease with Reliable Melbourne Accountants

Novated leasing could seem to be a complex task to you; however, if you work with a renowned firm in Melbourne like Reliable Melbourne Accountants, we may handle the complexities for you.

Do you intend to learn more about novated leasing? Our staff in chartered accountancy and a business advisory team may assist you to do so.

Get in touch with our small business accountant Melbourne. We cater to small to medium sized businesses for accounting and bookkeeping services. We adhere to all the laws mandated by the Australian Taxation Office (ATO).  

Call us now – 1300 049 534