How a novated lease can save you thousands on an electric vehicle

A novated lease for an EV involves a three-way arrangement between you, your employer and a leasing company or financial institution. Photograph: Getty

Price is often a barrier for people looking to buy their first electric vehicle.

But increasing numbers of Australians are asking if they really need to own their EV before getting behind the wheel.

The scrapping of fringe benefits tax for novated leases on electric and hybrid vehicles in 2022 is “undoubtedly having an impact” on EV demand, according to the head of the Electric Vehicle Council, Behyad Jafari.

Paul Scully, head of marketing at leasing company SG Fleet, said the number of people leasing EVs had more than doubled in the 16 months since the change.

“It’s generated a lot of interest that wasn’t there before,” Scully said.

So what is a novated lease and how can it potentially save you thousands of dollars on an electric vehicle?

What is a novated lease?

A novated lease is a way to finance a car.

It involves a three-way arrangement between you, your employer and a leasing company or financial institution. Your employer owns the vehicle through the course of the lease but you are responsible for repayments and able to drive it for private use.

The advantage of a novated lease is that payments are made from your pre-tax income in a form of salary sacrifice, helping reduce how much income tax you pay. The more you earn, the more attractive it becomes. The vehicle’s running costs – including tyres, servicing, registration and insurance – can also be packaged into the lease.

At the end of the lease, there’s usually the option to make a final payment to transfer ownership to you, or you may be able to enter into a new lease. The value of the final payment is determined by the government according to the original purchase price and length of the lease.

What’s changed, tax wise?

Usually leased vehicles driven for private use attract fringe benefits tax (FBT).

That’s no longer the case for electric and plug-in hybrid electric vehicles (PHEVs) up to the luxury car tax threshold of $89,332 – even if the car is never used for business purposes.

This means that leasing a circa-$71,000 Tesla Model Y can cost you less each year than leasing a $56,000 Toyota RAV4 Cruiser Hybrid (which is not plug-in, so doesn’t qualify), because the increased payments are offset by higher tax savings.

Leasing v buying a car

If you can afford to buy an EV upfront, then that’s still the most cost-effective option, according to associate professor Prafula Pearce, from the school of business and law at Edith Cowan University.

“Always, the cheapest way to own a car is to pay cash for it,” she says.

Leasing, however, can compare favourably to taking out a car loan. This depends on numerous factors, including the terms and interest rate and how much income tax you currently pay.

Calculations by Guardian Australia on the above Tesla suggest someone earning $100,000 could save more than $10,000 overall by leasing the vehicle for four years and then buying it, compared to buying it with a four-year car loan.

Keep in mind, these calculations are for one specific example and inputs such as interest rates can fluctuate.

As a general rule, Pearce says, “if you’re planning on keeping your vehicle long term, a car loan may be the cheaper option. If you want to upgrade regularly, a lease may be the convenient way to go.”

Beware of additional costs

Many leases have a set-up fee and ongoing finance and administration costs – read the fine print so you know what you’re up for.

One of the biggest costs of a novated lease is interest. Often the interest rate isn’t front and centre in online quotes, so you’ll need to dig it out. It’s currently typically between 7% and 9%, and leasing companies usually fix the rate. This can be to your advantage during interest rate rises but work against you in a cycle of rate cuts. Also, look whether there is additional insurance coverage you may not usually buy.

What else to watch out for

While you don’t need to pay FBT on an eligible EV, the benefit still needs to be reported to the tax office, something that can affect your eligibility for other benefits, such as the private health insurance rebate, parental leave, childcare subsidies, as well as child support obligations. The savings on a vehicle may also affect your HECS-HELP or student loan circumstances and it can determine whether you need to pay the Medicare levy.

Steven Ogle from SG Fleet says it’s crucial to seek expert advice from an accountant or adviser.

“Everyone’s individual circumstance is different,” he says. “There are great upfront tax savings … but you still need to assess any flow-on effects and look at the holistic impact on your household … not just this year, but next year and the year after.”

What if I change jobs?

It’s important to note that with a novated lease, then if you lose your job, change jobs or retire it’s up to you to transfer the lease, pay out the vehicle or arrange future payments.

Pearce says it’s important to understand the terms of your lease, and what will happen if you don’t get another job or your new employer won’t take on the lease.

Can I buy any EV to utilise the FBT exemption?

The government has capped the FBT benefits to the luxury car tax threshold, which for the 2023-2024 financial year is $89,332.

The FBT exemption also applies to second-hand EVs. However, they must have been first registered after 1 July 2022 and never paid any luxury car tax.

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