Is it cheaper to get an electric car on a novated lease? Here's what you need to know before signing on the dotted line.
As the cost of living continues to bite into household budgets, it can be difficult to justify the expense of a new car.
A novated lease is one option if you want to park a new EV in the driveway without forking out a wad of cash upfront – but how much money will you save over time, if any? We find out.
How does novated leasing work?
Novated leasing involves ‘salary sacrificing’, where your employer takes the payments out of your pay packet and sends them to the finance company that arranges the lease.
Straight away, this saves you money by reducing your taxable income – which will be particularly helpful if it brings you down into a lower tax bracket. For example, if you get paid $2000 per week and your employer starts taking out $300 p/w for your novated lease, you’re now taxed as if your income is only $1700 p/w.
This applies even if the vehicle is 100 per cent for personal use. Depending on your tax bracket, it can save you thousands of dollars in tax each year.
A ‘fully maintained’ novated lease allows you to salary sacrifice to cover both the initial purchase price and ongoing running costs of a new car. This includes everything, such as petrol or recharging, registration, insurance, tyres and servicing.
All these various costs are rolled into a single regular payment that is deducted from your payslip.
Alternatively, a ‘non-maintained’ novated lease only covers the purchase price and leaves you to cover the running costs.
Either way, your employer needs to be on board, as they need to make the payments to the finance company that arranges the lease. Some employers don’t allow novated leases and some only deal with a specific list of leasing companies. Other employers give you the freedom to shop around for a good novated lease deal.
Novated lease terms are usually between one and five years. Keep in mind that you don’t own the car outright at the end of the lease, so it’s important to read the fine print and understand your options.
What are the benefits of novated leasing an EV?
The key benefit of novated leasing any kind of car is saving money compared to a traditional car loan or redrawing from your home loan. Keep in mind that buying a car outright is typically the most cost-effective option if you can afford the upfront cost.
Along with this is the benefit of smoothing out your running expenses into a regular ongoing payment, so you’re not slugged with big bills.
A novated lease avoids paying thousands of dollars in GST on the purchase price of the car, as well as GST on your ongoing running costs. Some lease providers can save you even more money by getting you a bulk discount on the purchase price of the car.
- held and used for the first time on or after July 1, 2022
- used by a current employee or their associates, such as family members
- not the subject of luxury car tax
EVs eligible for the FBT exemption
Here are some examples of electric models currently eligible for the government’s Fringe Benefits Tax exemption, based on the current luxury car tax threshold. Please note that eligibility may vary depending on specification grade and on-road costs.
- BMW iX1
- BYD Atto 3
- BYD Dolphin
- BYD Seal
- Cupra Born
- Fiat 500e
- Hyundai Kona Electric
- Hyundai Ioniq 5
- Hyundai Ioniq 6
- Kia Niro Electric
- Kia EV6
- MG 4
- MG ZS EV
- Mini Electric
- Nissan Leaf
- Polestar 2
- Renault Megane E-Tech
- Tesla Model 3
- Tesla Model Y
- Volvo C40 Recharge
- Volvo XC40 Recharge
What are the limitations of novated leasing an EV?
The first shortcoming is that novated leases are only available to salaried employees because the lease relies on your employer to deduct the payments from your salary. Leasing agreements typically aren’t as flexible as loans when it comes to making extra repayments.
Additionally, it must be said that unless you manage to get a zero per cent interest rate, any kind of car finance is going to be more expensive over time than it would cost to purchase the vehicle upfront, so make sure you weigh up the benefits before making an ongoing commitment.
If you’re self-employed and have your own business with an ABN, you might be able to make yourself an employee in order to take advantage of novated leasing. It gets complicated, so it’s worth discussing it with your accountant and a novated leasing provider.
Another big shortcoming is that your employer needs to be part of the deal. If you lose your job, you’ll need to continue to make the repayments yourself until you find a new employer – assuming that new employer allows novated leases. Otherwise, you’ll need to pay off the balance, renew the lease for a longer term or else sell the car.
When it comes to EVs, unfortunately some of the EV incentives offered by state governments are not available through a novated lease, so it’s worth doing your research. For example, the NSW electric car rebate that ended in 2023 was not available for vehicles purchased under a novated lease.
Also, keep in mind that you can potentially bundle accessories into an EV novated lease (such as Tesla’s Mobile Connector cables which no longer come with the car), but unfortunately you probably can’t bundle in the cost of installing a home EV charger because it’s considered a home improvement with Capital Gains Tax implications.
BMW iX1 xDrive 30 – $84,900 plus on-road costs ($89,450 on the road in Victoria)
Novated lease 8.9% | Car loan 8.5% | Mortgage 7% | |
Finance amount | $83,258.36 | $89,450 | $89,450 |
Monthly finance payment | $1402.26 | $1822.30 | $1760.95 |
Monthly running costs | $387.42 | $417.91 | $417.91 |
Luxury non-deductible expense | $77.78 | N/A | N/A |
Lease management fee | $42.50 | N/A | N/A |
Total monthly costs | $1909.96 | $2240.21 | $2178.86 |
Monthly salary before tax | $7500 | $7500 | $7500 |
Less novated lease salary deduction | $1909.96 | N/A | N/A |
Taxable salary | $5590.04 | $7500 | $7500 |
Less income tax | $1140 | $1794 | $1794 |
Less vehicle finance and running costs | N/A | $2240.21 | $2178.86 |
Disposable income | $4450.04 | $3465.79 | $3527.14 |
Finance and running costs over five years | $75,357.60 | $134,412.60 | $130,731.60 |
Lease residual value | $25,762.64 | N/A | N/A |
Estimated total cost | $101,120.24 | $134,412.60 | $130,731.60 |
Source: Mark Telfer, Inside Edge Novated Leasing
What happens at the end of a novated lease?
The other major limitation of a novated lease is that you don’t own the vehicle at the end of the lease, although this isn’t necessarily a bad thing.
If you’re still happy with the car, you have the option to extend your lease at a cheaper rate. You can also buy the car outright, handing over a final residual ‘balloon’ payment to cover its remaining value – keeping in mind you’ll need to pay GST on this amount and then cover all the running costs going forward.
Alternatively, you might decide it’s time to upgrade to a new car on a new novated lease – which is particularly attractive with EVs, considering that the technology continues to improve year-on-year.
Most leasing companies won’t take back the vehicle after the lease ends. If you’re looking to upgrade, you might hand over the balloon payment to buy the vehicle and then sell or trade it in to cover that cost. Then you can sign a new novated lease on a new car.
Article written by Adam Turner for Drive.com.au: https://www.drive.com.au/caradvice/is-novated-leasing-an-ev-worth-it/