A novated car lease is a finance arrangement used with salary packaging. It is a motor vehicle lease that allows you to include a vehicle of choice in a salary package, helping to optimize your salary while offering flexibility and convenience.
It simply means that your employer pays for your car lease and car running costs out of your salary package through a combination of pre-tax and post-tax salary deductions. It allows you to drive the car you want – any make or model, without compromising your lifestyle.
When you salary package a novated car lease, you agree to forgo a portion of your salary in return for a fully-maintained car. The lease treats your personal car like a company car. It is a three-way agreement between you (the driver), your employer and a third party (Leasing Company).
The document used to formalise this agreement is called a novation agreement. A novation agreement is a common legal document used when assigning responsibilities (i.e. payment of your lease by your employer to the leasing company) to a third party.
How does it work? Typically, you’re leasing a car for a set period of time – usually at least two years, but sometimes three or five, and at the end of that period you can either trade up to a new model, and sign a new lease (which means you’re never stuck with an old or uncool car for too long), or, if you’ve fallen deeply in love with your vehicle, you can pay a pre-determined fee to buy it and keep it. This is often referred to as a “balloon payment”, possibly because it blows up to a number which is larger than you’d first believe possible.
What you have to get your mind around is that you’re not renting a car, or borrowing one, you are leasing it; paying down the amount of it you own, but realistically, if you prefer, never completely paying it off, which means you can regularly turn over your vehicle, and change brands, styles, sizes as you wish.
Where do the annual savings in a novated car lease come from? The savings come from a reduction in the initial purchase price through buying power and from not paying goods and services Tax (GST). There are also savings in fuel, maintenance and tyres (once again not paying the GST). And the last component of the savings comes by using pre-tax salary.
The difference between a novated car lease and normal finance is that your vehicle payments include all running expenses, and are taken from your pre-tax salary, so regardless of what scale of tax you pay, there’s always going to be a benefit.
Potential pitfalls to keep in mind with a novated car lease is that, should you lose your job, for example, you might have to get your new employer to take over the novated lease, or you might have to terminate the lease and pay out what’s owing, which might leave you stuck with additional charges. Also, novated car leases will also often come with administration fees, which is usually of a higher interest as compared to a car loan.