How to Pay for Your Car with Your Pre-Tax Dollars Using a Novated Lease

A novated lease is a form of vehicle finance and a three-way agreement between an employer, employee, and leasing company.

It allows an employee to finance a vehicle as part of their salary but uses the employee’s pre-tax salary to pay for the lease. This creates a unique opportunity to reduce your taxable income and pay for a vehicle, even if it’s entirely for personal use and never used for business. 

How Novated Leasing Works with Pre-Tax Earnings

A novated lease works in a similar way to a finance lease, but instead of making payments from your post-tax income, you’ll make payments from your pre-tax income. An employer will need to agree to make regular, automated payroll deductions from your pre-tax salary, and you’ll need to agree to the costs presented by the leasing company.

If you’re using a fully-maintained novated lease (which is generally the best way to save money in this situation) then your leasing company will estimate the costs of running the vehicle and include these in your payments. 

How do you Save Money with a Novated Lease? 

Payments are made directly to the financier by automatic payroll deduction. They are paid before the PAYG income tax is deducted from the employee’s salary. Because payments are made this way, it means that all your usual costs are reduced, as instead of just paying tax part of this money will go toward your lease payments. 

This means that, at the end of the year, your total income will be reduced, which is much better for maximising your tax refund to the ATO. It also means that you’ll never miss a payment (as the costs are deducted automatically before you’re paid) so you never have to worry about late payment or missed payment charges. 

How Novated Lease Payments Work in Detail

To make the most of a novated lease, you’ll need to understand how certain aspects of the agreement work, and what you can do to minimise extra costs. Novated lease repayments may require the use of your post-tax salary in some cases, which is where Fringe Benefit Tax (FBT) and the Employee Contribution Method (ECM) come into play.

These aren’t overly complicated to manage and understand, but it’s always best to speak with a financial adviser or accountant to make sure you can further reduce end-of-year tax payments and benefit the most from a novated lease.

Big Savings Upfront

When you acquire a vehicle through a novated leasing company, the total cost of your lease will include the cost of the vehicle, all fees, and the estimated running costs. Knowing this upfront allows you to plan ahead for your tax return, but there’s another major benefit to a novated lease that happens right at the point of purchase.

By using a novated lease, an employee can acquire a vehicle without paying GST on it. This can save a considerable amount of money and is one of only a few ways an employee can acquire a new vehicle without being obliged to pay the GST. 

It is possible to purchase a vehicle through a private sale with a novated lease, but this doesn’t include any GST savings as this won’t be included in a private sale. Therefore, most employees will choose to finance directly through a leasing company, both to save the most amount of money possible, and to ensure that there’s no hassle in acquiring and operating the vehicle.