Illawarra Mercury

Is a novated lease worth it?

Purchasing a car using a novated lease arrangement can typically save buyers thousands of dollars upfront. Picture: Shutterstock

This is branded content for Novated Lease Australia.

Novated leasing, or salary sacrifice, is an attractive way to acquire a new car in Australia if you qualify and the option is available from your employer.

It's generally regarded as the most cost-effective way for a permanent employee to have a vehicle while reducing their taxable income.

Too good to be true? We examine whether a novated lease is still worth it

A novated lease is an agreement between you, your employer, and a leasing company. Your employer agrees to make regular payments on the vehicle, a substantial portion of which is taken from pre-tax salary, which in turn reduces your taxable income.

Your employer makes recurring automated salary deductions for your vehicle, ensuring you are saving tax week after week, month after month, on a vehicle which may be entirely for personal use.

You acquire the vehicle for a price excluding GST, as it is purchased and leased to you from the financier, which will typically save thousands of dollars upfront.

So what's the downside? Surely there's some sort of lengthy process or paperwork?

Employers must be willing to facilitate a novated lease as a salary sacrifice option to their employees. Unlike other employee incentives such as holidays or bonuses, there's very little downside to the employer. If anything, there is an upside to the employer, by way of increased employee satisfaction as well as possible reduction in payroll tax liability.

The main responsibility includes setting up the novated leasing arrangement and automatic payroll deduction, which is easily done by signing one or two documents with the novated leasing company, who then makes the process as streamlined as possible for both employer and employee.

Facilitating novated leasing to all permanent employees is simply a "no brainer" and ensures the employer offers perks in line with their competitors.

Should an employee decide to move on, the employer's agreement to handle lease payments will cease, enabling the employee to re-package their novated lease at their new employer.

If the employee takes a break from the workforce, they would simply make the finance payment each month until such time as they become employed.

A car purchased using a novated lease can be for work or entirely for personal use. Picture: Shutterstock

You buy the car, but what about the expenses? What about fuel or servicing?

Amelia Roberts from Novated Lease Australia says this is where a novated lease is really known to shine.

"As a 'fully-maintained' novated lease allows employees to include all costs associated with the vehicle in their lease payments," she says.

"As you're avoiding the GST on your petrol for example, it equates to more than 15 cents per litre being saved."

Your running costs will be budgeted upfront and used to determine your regular salary deductions. Typically, you'll be supplied with a unique "fleet card" to track your expenditure for operating the vehicle, which you can compare against your evaluated expenditure online. Of course, budgeted running costs can be adjusted during the lease period and there is a full reconciliation to ensure all is fair and square at end of lease.

Whilst many lease providers will sell a preferred insurance provider, you can always opt for your own insurance provider. You can also have the car serviced where you wish. All the employee needs to do is track their spending with the supplied card (or obtain and evidence a tax invoice if paying "out of pocket"), and the total costs will be reimbursed from pre-tax lease funds.

So, what do you need to look out for?

While there's no real downside as an employer, there are some pitfalls for the employee.

Firstly, the novated lease is generally not attractive to end before the agreed term is up. Of course, the same could be said for a car loan or outright cash purchase on the vehicle. However, on novated lease, the tax offsets and savings are calculated based on the term you choose.

Like any finance decision, do your own research. In many cases, the novated lease will come out ahead of outright cash purchase, as the GST and income tax savings are significantly higher than the interest component on the finance.

This is branded content for Novated Lease Australia.