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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 salary sacrificing it 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 will make these payments.

Benefits of a novated lease

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 programs that can reduce the retail price of a vehicle.
  • Easy loan management. As the lease payments and, depending on the option you choose, car running costs, come straight out of your salary, you don’t have to worry about budgeting and managing 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 will be tax-free.
  • No usage restrictions. There are no limitations on the way 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.
  • Not attached to the business. Novated leases are not considered an asset or liability of the business.
  • 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 vehicle, but they are able to pass this GST off as a business expense.

Frequently asked questions

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