Buying a new car is one of the biggest purchases many Australians make, second only to buying a home. Between the purchase price, registration, insurance, fuel, servicing and tyres, the true cost of owning a vehicle can add up quickly. That’s why many employees look for smarter ways to manage those expenses.
One option that’s gained popularity is salary packaging a car through a novated lease. It allows eligible employees to pay for a vehicle and some or all of its running costs using a combination of pre-tax and post-tax income. For some people, it can reduce taxable income and make car ownership more affordable. Keeping an eye on novated lease specials can also help buyers find competitive deals on popular vehicles. But is salary packaging right for you?
Contents
What is salary packaging?
Salary packaging, sometimes called salary sacrificing, is an arrangement where an employee agrees to receive part of their salary as benefits instead of cash. These benefits are paid by the employer on the employee’s behalf.
Common salary packaging benefits include superannuation contributions, work-related expenses and, in many cases, vehicles through a novated lease. Whether salary packaging is available depends on your employer and their policies.
How a novated lease works
A novated lease is a three-way agreement between an employee, their employer and a leasing provider. The employee chooses a car, and the employer agrees to make lease payments from the employee’s salary.
The lease can include the cost of the vehicle along with running expenses such as fuel or charging, servicing, tyres, registration and insurance. These costs are bundled into regular payments deducted from your pay.
If you change jobs, the lease usually stays with you, although you’ll need to arrange new payment arrangements with your new employer or pay the leasing provider directly. At the end of the lease term, there’s typically a residual payment. You can choose to pay it and keep the car, refinance the residual, trade in the vehicle or start a new lease.
Potential benefits
One of the main advantages of a novated lease is the potential tax benefit. Because some payments are made from your pre-tax income, your taxable income may be reduced, which may lower the amount of tax you pay.
There may also be GST savings on the purchase price and eligible running costs, depending on the arrangement.
Bundling vehicle costs into one regular payment can make budgeting easier. Instead of dealing with separate bills for registration, servicing and insurance, many expenses are managed through the lease.
Some novated leasing providers also offer access to fleet discounts, which may reduce the cost of buying a vehicle.
Electric vehicles and novated leasing
Electric vehicles have become a major focus of novated leasing in recent years. In Australia, eligible electric vehicles may receive additional tax benefits under current rules, which can make salary packaging particularly attractive. Charging costs, servicing and insurance may also be included in the lease. Because government policies and eligibility criteria can change, it’s important to check the current rules before choosing a vehicle.
Things to consider before signing
While novated leases can offer benefits, they aren’t right for everyone. Your income level, how far you drive, the vehicle you choose and the length of the lease can all affect the overall value.
Fringe benefits tax may apply to some vehicles, although arrangements are often structured to minimise this. Understanding how FBT works and how it affects your situation is important.
The residual payment at the end of the lease also needs to be considered. Make sure you understand how much it will be and how you’ll handle it when the lease ends.
Compare the total cost of a novated lease with other options, such as a car loan or paying cash. Ask for detailed quotes showing all fees, interest rates, running costs and residual values. Read the fine print carefully, including fees for early termination or changes to the lease.
Is it worth it, and getting advice
Whether salary packaging a car is worthwhile depends on your circumstances. It can be particularly appealing for employees on higher incomes, people who drive regularly, those considering an electric vehicle and anyone who values the convenience of bundled payments. However, if you only drive occasionally or plan to keep a car for many years after buying it, other options may be more cost-effective.
Because tax laws and individual circumstances vary, it’s a good idea to seek advice before entering into a novated lease. Talk to your employer, leasing provider, accountant or a licensed financial adviser to understand how salary packaging will affect your finances.
Salary packaging can be a smart way to manage the cost of your next car, potentially offering tax savings, simplified budgeting and access to competitive deals. By understanding how novated leases work and carefully comparing your options, you can make an informed decision about whether it’s the right choice for you.
