A novated lease is a popular salary packaging option, offering significant financial benefits, especially for employees looking to drive a new vehicle while reducing their taxable income.
But is it really worth it?
Let’s break down the numbers and explore whether a novated lease is a smart financial move for you.
What Is a Novated Lease?
A novated lease is a three-way agreement between an employee, employer, and leasing company. It allows you to lease a car using your pre-tax income, reducing your taxable salary and potentially saving you thousands of dollars on tax.
All car-related costs, including lease payments, registration, insurance, and maintenance, are bundled into one simple pre-tax payment, making it an attractive option for many Australians.
But the big question remains: Is it really worth it?
Breaking Down the Financial Benefits of a Novated Lease
Let’s dive into the key financial advantages that a novated lease offers.
1. Tax Savings
One of the biggest benefits of a novated lease is the ability to reduce your taxable income. Lease payments are made with pre-tax dollars, which means you pay less income tax. This is particularly beneficial for higher-income earners, as the savings become more significant in higher tax brackets.
Example:
Let’s say you earn $100,000 a year. If you enter a novated lease with annual lease payments of $12,000, your taxable income is reduced to $88,000. This reduction in taxable income can result in significant savings on your annual tax bill.
For high-income earners, this tax-saving structure is particularly valuable, as it allows you to retain more of your income while driving a new car.
2. GST Savings
Another financial advantage of novated leasing is the GST exemption. With a novated lease, you don’t have to pay GST on the purchase price of the vehicle or any running costs, such as maintenance, insurance, or fuel. This can save you an additional significant amount on the cost of the car and its expenses.
Example:
If the car you’re leasing costs $60,000, you’ll save $5,454 in GST alone. Combined with the tax savings on your salary, this adds up to substantial financial benefits.
3. Bundled Running Costs
A novated lease not only covers the cost of the car but also bundles all running costs—registration, insurance, maintenance, and fuel—into one pre-tax payment. This allows you to pay for these expenses using pre-tax income, reducing your overall tax burden.
Example:
If your car’s annual running costs (insurance, maintenance, registration) amount to $5,000, you’ll be paying for these costs with pre-tax dollars, further reducing your taxable income and saving you money on everyday vehicle expenses.
Crunching the Numbers: A Real-World Example
To determine if a novated lease is truly worth it, let’s take a closer look at a real-world example. Imagine you’re earning $120,000 a year and want to lease a Tesla Model 3 with an annual lease cost of $15,000.
Pre-Tax Scenario (with Novated Lease):
- Salary: $120,000
- Annual Lease Cost: $15,000
- Taxable Income After Lease Deductions: $105,000
By reducing your taxable income to $105,000, you’ll not only drive a new car but also enjoy significant tax savings.
Let’s say you’re in the 30% tax bracket. By reducing your taxable income by $15,000, you save approximately $5,900 in tax annually. Over the course of a 5-year lease, that’s nearly $30,000 in tax savings.
Plus, you don’t pay GST on the car, so if the Tesla costs $60,000, you save nearly $5,500 on GST alone.
Post-Tax Scenario (without Novated Lease):
If you were to purchase the same car without a novated lease, you’d pay for the car with post-tax dollars, meaning your full $120,000 salary would be taxed before you cover the vehicle’s costs. This would result in significantly higher tax payments and fewer savings.
When a Novated Lease Might Not Be Worth It?
While the numbers clearly show that a novated lease offers substantial savings, it’s not always the right choice for everyone. Here are a few scenarios where a novated lease might not be worth it:
1. You Drive Very Little
If you don’t drive much or prefer to use public transportation, a novated lease might not be the most cost-effective option. Since leases often come with km restrictions, you could end up paying for a car you don’t use as much as you anticipated.
2. You Prefer to Own a Car Long-Term
With a novated lease, you don’t own the car at the end of the lease term unless you choose to buy it by paying the residual value. If you prefer to own your car long-term rather than upgrade every few years, a novated lease might not align with your financial goals.
3. Your Employer Doesn’t Offer Salary Packaging
A novated lease requires your employer to be on board with the incentive, as the payments come from your pre-tax salary. If your employer doesn’t offer salary packaging, you won’t be able to take advantage of a novated lease.
The Pros of a Novated Lease
To summarise, here are the key benefits of a novated lease:
- Tax savings by reducing your taxable income.
- GST exemption on the vehicle purchase price and running costs.
- Bundling running costs into a single payment, reducing out-of-pocket expenses.
- Flexibility to upgrade to a new car at the end of the lease term.
The Cons of a Novated Lease
While novated leases offer substantial financial benefits, there are some potential downsides:
- You don’t own the car during the lease term.
- You may face km restrictions.
- You’ll need your employer to offer salary packaging.
Is a Novated Lease Really Worth It?
Yes, a novated lease can be incredibly worthwhile, especially for high-income earners who want to reduce their taxable income, save on GST, and bundle all their car-related costs into one easy payment.
By crunching the numbers, it’s clear that a novated lease offers significant tax savings and financial benefits, particularly for those looking to drive a new vehicle every few years.
If you’re earning a higher income, the tax benefits alone make a novated lease a smart financial decision. Plus, with additional savings on GST and running costs, it’s one of the most cost-effective ways to drive a new car in Australia.
Ready to explore your novated lease options? Contact CarBon Novated Leasing today to find out how much you could save.