Is a Novated Lease Worth it?

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When it comes to buying a new car, the decision-making process can be confusing and take time. Among the various options available, a novated lease stands out as you can enjoy tax benefits and flexible vehicle ownership. However, determining whether a novated lease is worth it requires careful consideration of your financial situation, lifestyle, and preferences. 

Let’s delve into the factors to weigh when deciding if a novated lease is the right choice for you.

Understanding the Basics of a Novated Lease

Before delving into its worth, let’s clarify what a novated lease actually is. 

A novated lease is a three-way agreement between an employer, an employee, and a finance company. The employee leases a vehicle of their choice, with lease payments and running costs deducted from their pre-tax income by the employer. 

With a novated lease you can buy a new, used or existing car. Plus, you can bundle your car running costs, meaning you can cover all expenses in one, easy monthly payment. 

Factors to Consider If a Novated Lease is Worth it to You

  1. Tax Benefits

One of the primary draws of a novated lease is its potential tax advantages. By using pre-tax income to cover lease payments and running costs, employees can reduce their taxable income, meaning an increased take-home pay. In addition, certain running costs associated with the vehicle, such as fuel and maintenance, may be tax-deductible, further increasing the potential tax benefits of a novated lease.

Not only that, but you can also save on GST when purchasing the car itself. 

  1. Flexibility

Novated leases offer flexibility in vehicle choice and lease terms, so long as it’s in line with your employers novated leasing policies. This can be appealing for individuals who prefer to change vehicles regularly or want the flexibility to tailor their lease to suit their needs. Plus, it means you can buy a pre-owned or existing car, rather than only being able to get a novated lease on a new car. 

  1. Budgeting

Novated leases provide a structured way to budget for vehicle-related expenses, as these costs are bundled into a single payment. This can make budgeting more predictable and manageable.

Running costs you can bundle include fuel, maintenance and repairs, registration, insurance premiums, tyres, and even regular car washing. 

  1. Employer Involvement

A novated lease requires the involvement of your employer, as they play a role in facilitating the lease and deducting payments from your salary. This level of employer involvement may not suit everyone, and your employer may have specific policies related to novated leasing already in place. It’s important to check in with your HR advisor to get an understanding of whether they offer this benefit. 

  1. End-of-Lease Options

At the end of the lease term, you may have the option to purchase the vehicle, refinance the lease, or return the vehicle, depending on the terms of the agreement.

The Clear Lease team can help guide you through all of your end-of-lease options to make sure there’s a solution that’s right for you. 

  1. Personal Circumstances

Your personal circumstances, such as your income, tax situation, and future plans, will also impact whether a novated lease is worth it for you. You can get an idea of the savings and costs involved by using our novated lease calculator. 

  1. Employment Stability

Since the lease is tied to employment, changes in employment status can impact the lease arrangement. If you do end up leaving your employer for any reason, your novated lease agreement is terminated. This means you can either: 

  1. Transfer your novated lease to a new employer
  2. Continue your monthly lease repayments yourself (what’s known as an un-novated lease)
  3. Pay out the remaining amount of the lease (including the residual value), and keep or sell the car

No matter which option you choose, the Clear Lease team can help support you through this process. 

What are the Claimable Expenses Available?

  1. Fuel Costs

If you use the leased vehicle for work-related purposes, you may be able to claim a portion of your fuel costs as a tax deduction. This usually requires maintaining a logbook to track your work-related mileage.

  1. Maintenance and Repairs

Expenses related to the maintenance and repair of the leased vehicle, such as servicing costs or repairs due to wear and tear, may be claimable as tax deductions.

  1. Insurance Premiums 

The insurance premiums for the leased vehicle, including comprehensive insurance, may be tax-deductible if the vehicle is used for work-related purposes.

Is a Novated Lease Worth It for You?

Ultimately, whether a novated lease is worth it depends on your individual circumstances and priorities. If you value the potential tax savings, flexibility in vehicle choice, and a structured approach to budgeting, a novated lease could be a worthwhile option. However, it’s essential to carefully evaluate the costs, benefits, and level of employer involvement to determine if it aligns with your financial goals and lifestyle.

Before committing to a novated lease, consider seeking advice from a financial advisor or consulting with your employer to fully understand the implications and whether it’s the right choice for you.

FAQs

What are the risks with a novated lease?

While there’s plenty of benefits of a novated lease, it’s only fair to also outline the risks. 

  • Changes to employment: if you lose your job or move on to a new business, your lease will be terminated. Clear Lease helps you navigate the options available, which include: 
  1. Transferring your novated lease to a new employer
  2. Continuing your monthly lease payments yourself (an un-novated lease)
  3. Paying out the remaining amount of the lease (including the residual value) and keeping or selling the car
  • Depreciation of your car: Like any car ownership, there’s always depreciation to consider, meaning the worth of the car could be lower than expected at the end of your novated lease. 

Does a novated lease reduce your taxable income?

A novated lease can definitely reduce your taxable income as your lease payments and bundled running costs are deducted from your pre-tax income. 

The amount you’ll save depends on various factors, including your income, vehicle cost, lease term, and which running costs you’d like to include. To get an idea of your savings, use our free novated lease calculator

What happens to my car at the end of a novated lease?

When your novated lease reaches the end of its term, you have a few options that the Clear Lease team can help you with. This includes: 

  1. Buying the car: You can pay the residual payment which means that the car will be yours after your novated lease ends. 
  1. Trade-in and get a new lease: For this option, you will again need to cover the residual payment. But instead of buying the car, you then trade this in, allowing you to get a new car on a separate novated lease. 

With the help of Clear Lease, arranging for the money you make on the trade-in of your old car can be used to pay off the residual value. 

  1. Renew your existing lease: If you’re happy with your current car, you can continue to take advantage of the benefits of a novated lease by refinancing the residual payment into a new lease. This typically means your repayments will be lower than your last lease. 

To figure out which option is best for you, speak to a Clear Lease consultant today.

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