A novated lease is a financial arrangement that allows an employee to lease a car using their pre-tax salary, effectively reducing their taxable income. This type of lease involves three parties: the employee, the employer, and a finance company. Here’s a detailed explanation:
A novated lease involves your employer making the payments to the leasing company on your behalf, then reducing your wages by the amount of the payment. This is called a salary sacrifice or salary packaging arrangement, and it means you end up paying less tax on your income.
You can purchase a new or used vehicle under a novated lease, and you may be able to bundle not only the purchase price and the finance costs but also the running costs such as fuel, servicing, and insurance. This means the total costs of owning a vehicle are bundled into a single payment and deducted from your before-tax salary.
What are the tax benefits of a novated lease in detail?
A novated lease allows you to purchase a vehicle and make payments out of your pre-tax income. This arrangement reduces your taxable income, resulting in tax savings. Here are some key points:
Pre-tax payments: Your employer makes payments on your behalf from your salary before taxes are deducted. This reduces your taxable income, which means you pay less income tax.
GST savings: You do not have to pay GST on the purchase price of the vehicle, which can save you a significant amount of money.
Running costs: You can include all running costs such as fuel, insurance, maintenance, and registration in your pre-tax payments. This further reduces your taxable income and increases your tax savings.
Fringe Benefits Tax (FBT) exemption: Novated leases on electric vehicles and plug-in hybrids are exempt from FBT if the vehicle is valued below the luxury car tax threshold ($91,387 in FY24/25). For other vehicles subject to FBT, the lease can be set up to include some post-tax salary contributions to cancel out any FBT liability.
What can be bundled under a novated lease?
A novated lease allows you to bundle many of your car-related expenses into one regular payment, which can be made from your pre-tax salary. Here are the details:
A novated lease bundles all your car repayments and budgeted running costs into one regular payment directly from your pay. You can use a mixture of post- and pre-tax funds to help pay for:
· Fuel
· Tyres
· Registration
· Maintenance
· Car detailing
· Accessories like tow bars, window tint and roof racks. (Fitted before delivery)
What can’t be bundled under a novated lease?
A novated lease allows you to bundle many of your car-related expenses into one regular payment, which can be made from your pre-tax salary.
However, there are certain items that you cannot include in a novated lease, for example:
· Road Tolls
· Traffic Infringements
· Accessories fitted to the vehicle after purchase.
These expenses must be paid out of your post-tax income.
What happens at the end of a novated lease?
At the end of the lease agreement period, you can choose to:
· Trade you existing vehicle in and take a new novated lease
· Make the final payment (called a residual payment) and take over ownership of the vehicle
· You could extend your lease for another period.