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A New Lease on Driving Life
Updated 11 Dec 2024
Michael Jacobson
With so many financial systems and options available to buy a car, it's more important than ever to do your research and make an informed decision. One option that has been gaining traction in recent years is novated leasing.
Novated leasing offers a range of benefits that can make it an attractive choice for many individuals. It’s a type of salary packaging arrangement where your employer helps you lease a car, allowing you to make repayments using pre-tax income, which can lead to significant tax savings. However, despite its advantages, the term "novated leasing" itself isn’t exactly straightforward or easy to understand at first glance. Many people are unfamiliar with how it works, which can make it seem more complicated than it actually is.
Taking the time to learn about novated leasing could reveal it as a viable option for your next vehicle purchase, especially if you're looking for a financially efficient solution.
A novated lease is a straightforward agreement between you, your employer, and a third-party financier.
With a novated lease, your employer deducts a single combined amount from your pre-tax salary to cover both the lease repayments and the estimated operating costs of your newly leased vehicle. It’s a convenient, tax-efficient system approved by the Australian Tax Office, offering potential savings. On top of that, you might also benefit from fleet discounts on fuel and servicing.
Sounds great, right? On the surface, it certainly does—but that’s why it’s essential to dig a little deeper.
When purchasing a vehicle, especially a second-hand one, most of us take extra care to inspect the details. From the paintwork and tyres to the transmission and safety systems, we ensure every aspect is in good condition. But when it comes to financing, some people stop being thorough. They’re so relieved to have their finance approved that they overlook the importance of studying the fine print.
With novated leasing, diligence is crucial. Start by understanding the type of novated lease you’ve entered into, as there are several variations. For instance, a novated operating lease allows you full access to the vehicle during the lease term. Once the lease ends, your financial obligations cease—pending a final inspection—but you also lose ownership of the car.
Taking the time to understand these details can make a significant difference, ensuring your leasing experience is as smooth as your ride.
A novated finance lease considers the car's residual value at the end of the lease term. If the car's value at that time is less than the originally guaranteed amount, you'll need to cover the difference out of pocket.
In contrast, a fully maintained operating lease includes all running costs as part of your salary agreement, making things more convenient. Meanwhile, a non-maintained operating lease shifts the responsibility for these costs to you, leaving them separate from the lease repayments.
Another option is a budgeted finance lease, which allows you to plan and allocate funds for maintenance costs. However, not all financiers offer this flexibility, so it's worth confirming in advance.
Once you've chosen the lease type that suits your needs—or more importantly, the one your employer supports—there are a few additional considerations. If you change jobs, you’ll need to review your new employer’s novated leasing arrangements. If they don’t offer any, speak with your lease provider to see if you can personally take over the obligations. Equally vital, confirm with your provider what happens to your lease if you lose your job.
One crucial term to understand from the outset is "residual." This refers to the GST-inclusive amount you’ll owe at the end of a novated lease. Calculated by the ATO, the residual is typically presented as a percentage of the initial finance amount. These figures can vary significantly, and in some cases, the residual can be substantial. Be sure to do your research and prepare accordingly—this is key to enjoying a stress-free leasing experience.
If you prefer to handle car maintenance yourself, AutoGuru can make things easier. Get instant quotes for your next car service or repairs—both minor and major. We’re your go-to platform for all things automotive!
Written By
Michael Jacobson
Michael Jacobson is an award-winning Queensland-based writer.
His appreciation for motoring began as a young journalist covering racing from Simmons Plains in Tasmania.
Over the years he has interviewed many Australian and international motoring greats.
He has also been driven around Lakeside Raceway at ferocious speed, circumnavigated the Gold Coast Indy circuit at more than 200kmh and managed to squeeze 365,000 kilometres out of a Toyota Starlet.