What is a novated lease and how does it work in Australia?

What is a novated lease and how does it work in Australia? A novated lease is a popular way of financing a new car in Australia. It’s a three-way agreement between an employee, their employer, and a finance company. Essentially, it’s a salary packaging arrangement that allows employees to purchase a car using pre-tax dollars. This can result in significant savings over the life of the lease.

The way a novated lease works is relatively simple. The employee chooses the car they want and negotiates the price with the dealer. They then enter into a lease agreement with the finance company, who purchases the car on their behalf. The lease payments are deducted from the employee’s pre-tax salary, which can reduce their taxable income and potentially lower their overall tax bill.

The novated lease is “novated” to the employer, which means that the employer takes on the responsibility for making the lease payments on behalf of the employee. The employer also deducts the lease payments from the employee’s pre-tax salary, which means that the employee doesn’t have to worry about making the payments themselves. In return, the employee agrees to salary sacrifice a portion of their pre-tax income to cover the lease payments.

At the end of the lease term, the employee has several options. They can either return the car to the finance company and walk away, refinance the residual value and keep the car, or trade it in for a new car and start a new novated lease. It’s worth noting that the residual value is the amount that the employee will need to pay to keep the car at the end of the lease term. This is typically set at around 30-40% of the car’s original purchase price.

There are several advantages to a novated lease. Firstly, it can be a tax-effective way of financing a car. The lease payments are made with pre-tax income, which can lower the employee’s taxable income and potentially reduce their overall tax bill. Secondly, the employee has the option to bundle all their car-related expenses into one regular payment, which can make budgeting easier. Finally, because the lease is “novated” to the employer, the employee can take advantage of the employer’s buying power to negotiate a better deal on the car.

In summary, a novated lease is a way of financing a new car in Australia using pre-tax income. It’s a three-way agreement between the employee, their employer, and a finance company. The employee chooses the car they want, negotiates the price, and enters into a lease agreement with the finance company. The lease payments are deducted from the employee’s pre-tax salary, which can reduce their taxable income and potentially lower their overall tax bill. At the end of the lease term, the employee has several options, including returning the car to the finance company, refinancing the residual value and keeping the car, or trading it in for a new car and starting a new novated lease.

What is a novated lease and how does it work in Australia? Speak with a qualified broker today!