Is Novated Lease Tax Deductible?

When it comes to salary packaging a car, one of the most common questions is whether a novated lease is tax deductible. The answer lies in how a novated lease is structured and the way it interacts with your income and tax obligations.

A novated lease is a three-way agreement between you, your employer, and a finance company. Through this arrangement, your employer deducts lease payments from your pre-tax salary, lowering your taxable income. While the lease itself isn’t directly tax-deductible in the way business expenses are for companies, the reduction in your taxable income can provide significant tax savings.

How Does a Novated Lease Save You Tax?

Here’s how it works. Your employer pays for the lease and running costs of the car (like fuel, maintenance, and insurance) using a combination of your pre-tax and post-tax income. By using pre-tax dollars for these payments, you effectively reduce your overall taxable income. The result? You pay less income tax over the course of the lease term.

For example, if you earn $100,000 per year, and $15,000 of that goes towards your car through a novated lease, your taxable income would be reduced to $85,000. This not only lowers your tax bill but also spreads your vehicle expenses across the life of the lease, providing financial convenience.

Fringe Benefits Tax (FBT) Consideration

Since a novated lease is a benefit provided by your employer, it is subject to Fringe Benefits Tax (FBT). However, your employer generally accounts for this tax when structuring your salary packaging arrangement. To minimise the impact of FBT, a portion of the lease payments is usually taken from your post-tax income as well.

Is It Worth It?

While the lease itself isn’t a direct tax deduction, the tax savings through salary packaging can make a novated lease an attractive option. It provides an efficient way to manage your vehicle expenses while enjoying potential savings on your tax bill.

Ready to explore your novated lease options? Contact us today to find out how much you could save with a tailored novated lease arrangement.