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What is a novated lease?

A novated lease lets you salary sacrifice a car and running costs

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Matt Corke
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If you want to reduce your taxable income but get something for it, such as your next car, you can consider sacrificing your salary with a novated lease. Find out exactly how it works and if it’s right for you.

What is a novated lease?

A novated car lease is an agreement between you, your employer and a finance company whereby you take out a lease, and your employer takes the lease repayments and operating costs out of your pre-tax income. While the responsibility for these repayments is still yours, it is your employer who makes these payments.

You can find some novated lease companies in New Zealand, for example, ORIX and Driveline.

What types of novated leases are there in New Zealand?

  • Novated operating lease. This type of lease allows you to use the vehicle for the duration of the lease, and at the end of the lease, you have no obligations. You also have no further access to the car. The vehicle is inspected on its return, and it must be in good condition, apart from normal wear and tear.
  • Novated finance lease. This type of lease requires you to guarantee upfront the residual value of the vehicle. At the end of the lease term, if the valuation is less than the agreed residual value, then you are responsible for the shortfall. Again, note that it is you and not your employer who needs to pay this.
  • Fully-maintained operating lease. A fully-maintained lease involves all of the vehicle’s operating costs being included in the salary package.
  • Non-maintained operating lease. Under this type of lease, you are responsible for the operating costs of the vehicle, including maintenance and running costs. Therefore, only the lease repayments come out of your pre-tax income.

Leasing vs buying

Leasing a car

Borrow a vehicle under a contract and drive an average number of kilometres annually.

Buying a car

Purchase a vehicle using a loan or your own money that results in you owning it outright.

BenefitsDrawbacks
Leasing
  • Upgrade your car every two or three years
  • Less upfront money is required
  • An option for people who travel frequently and need a car in various locations
  • An option for businesses that don’t want their cash flow tied up in a depreciating asset
  • In the long term, leasing a car may be just as or more expensive than a car loan when you consider monthly repayments, fees and charges
  • You can’t make any alterations to the car
  • You can’t claim the car as your asset for other borrowing or financial purposes
Buying
  • Own the car outright and make similar repayments to leasing
  • Claim the vehicle as your asset whether you take out a car loan or buy it outright
  • It may require a more significant upfront cost
  • The value of the car depreciates in time, making your investment less valuable

Questions to ask

How often will I be driving the car?

Leases usually require you to drive an average number of kilometres annually.

Do I own a car now?

If you already own a car, you may be able to take advantage of a trade-in offered by some dealerships. You can also sell your car and put more money on a lease.

What about my credit history?

Leasing companies may not approve you for a lease if you have a bad credit history. However, you can find specialised bad credit loans.

What are the benefits of a novated lease in New Zealand?

For the employee

  • Cost and tax benefits. You can use your pre-tax income to cover some of the costs of the lease. You may also benefit from corporate fleet discount programmes that can reduce the retail price of a vehicle.
  • Easy loan management. Depending on your choice, the lease payments and car running costs come straight out of your salary. So you don’t have to worry about budgeting and to manage them yourself.
  • Vehicle options. You can finance both new and used vehicles with a novated lease.
  • After-lease sale benefits. If you decide to sell your vehicle after the lease is up, any profit from the sale is tax-free.
  • No usage restrictions. There are no limitations on how you use the vehicle, and you can use it for business or personal use as much as you like.

    For the employer

    • A way to offer incentives. A novated lease is a way to incentivise employees with little expense to your business.
    • Limited risk. You won’t be responsible for the vehicle if your employee leaves before the lease is up.
    • It is not attached to the business. Novated leases are not considered an asset or liability of the company.
    • You don’t need to arrange a company fleet. Novated leases are a way for your employees to access discounted vehicle leasing through your company without the burden of your business managing a company fleet.

      How does a novated lease work in terms of tax?

      When you choose this method, the entire amount of your lease payments is deducted from your pre-tax income, saving that portion of your salary from income tax.

      Another key benefit of a novated lease is that you don’t have to pay GST. As the vehicle is sold to the lender and then leased to you, they are liable to pay the GST on the car, but they can pass this GST off as a business expense.

      How to arrange a novated lease in New Zealand

      Title

      While there are more tax and monetary considerations for novated leases, the process is not complicated as long as you choose the right financier. Here is the typical process that you can expect:

      • Step 1. Shop around for a vehicle and get a quote. Ensure that the quote lists all options, including projected operating costs, vehicle options and the vehicle cost.
      • Step 2. Estimate how many kilometres you’ll travel over a year. You can do this by tracking your usage over a typical week and factoring in holidays and other times when you might use your car more.
      • Step 3. Decide if you want a fully maintained or non-maintained novated lease.
      • Step 4. Contact your company’s financial consultant and discuss your options. Together, you can prepare an estimated salary package, which you can sign when you’re happy with it.
      • Step 5. Compare your novated lease options and apply with your chosen provider.
      • Step 6. Provide your car dealer’s details to your financial consultant so that the Novated Lease Agreement can be prepared and signed.
      • Step 7. Compare your comprehensive car insurance options and apply for your chosen provider. Then get your cover approved by your financial consultant.
      • Step 8. Your financial consultant organises payment to the dealer, and if you have a fully-maintained novated lease, they also manage payment to your insurance provider.
      • Step 9. You can collect your vehicle and receive your fuel card from your financier, so you can start using your car.

      Frequently asked questions

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