If you’ve changed jobs recently or work for a larger employer, chances are you’ve been asked one question:
“Have you considered a novated lease?”
They’re often promoted as a fantastic way to buy your next car while saving tax. And while they certainly can be beneficial in the right circumstances, they’re not always the bargain they’re made out to be.
Like most financial strategies, the answer isn’t a simple yes or no.
What is a novated lease?
A novated lease is an arrangement where your employer agrees to make your car repayments from your salary. Depending on the type of vehicle and your circumstances, some of those payments may come from your pre-tax income, potentially reducing your taxable income.
For eligible electric vehicles, the tax benefits can be particularly attractive because many qualify for Fringe Benefits Tax (FBT) exemptions, making novated leases far more tax-effective than they have traditionally been.
But that’s only one part of the story.
Look beyond the tax savings
Many advertisements focus heavily on the tax benefit, showing how much income tax you could save over the life of the lease.
What they don’t always highlight are the costs built into the arrangement.
These can include:
- lease establishment fees;
- ongoing administration fees;
- finance charges;
- compulsory maintenance budgets;
- tyre and servicing allowances;
- insurance management fees; and
- end-of-lease costs.
Some of these expenses are perfectly reasonable, but together they can add up to thousands of dollars over the term of the lease.
It’s important to remember that a tax saving doesn’t automatically mean you’re financially better off if you’re paying significantly more for the overall package.
Cash flow matters too
A novated lease generally bundles together most of the running costs of the vehicle into one regular payroll deduction.
For some families, that’s a real advantage. It makes budgeting easier because fuel, servicing, registration and insurance are effectively prepaid throughout the year.
For others, however, it can reduce flexibility.
If you drive fewer kilometres than expected or don’t spend the full maintenance allowance, there may be adjustments required, and understanding exactly where your money has gone isn’t always straightforward.
Consider your employment situation
Another factor people often overlook is what happens if they change jobs.
A novated lease is linked to your employment. If you resign, are made redundant or move to an employer that doesn’t offer novated leasing, you’ll generally become responsible for the lease payments yourself or need to make alternative arrangements.
That’s not necessarily a problem, but it’s something that should be considered before signing a five-year agreement.
So, are they worth it?
The answer is: it depends.
For some people—particularly those purchasing eligible electric vehicles while the current FBT concessions remain available—a novated lease can produce genuine savings.
For others, especially when financing a petrol or diesel vehicle, the overall benefit can be much smaller once all the fees, finance costs and administration charges are taken into account.
Before signing any agreement, ask for a full comparison.
What would it cost to buy the car with a standard car loan? What if you paid cash? What is the total amount you’ll pay over the life of the lease, including all fees and the final residual payment?
The cheapest way to own a car isn’t always the one with the biggest advertised tax saving.
As accountants at the SWU Group, we’ve found that the best decision comes from comparing the total cost—not just the tax benefit. Sometimes a novated lease is the right answer, but sometimes it’s simply a more expensive way to buy the same car. If you need further information, please reach out to us.