Novated Leases and Electric Cars Guide: Key Things to Know in 2022

A novated lease is a three-way car agreement between an employer, an employee and a financing company. The 'Electric Car Discount', expected to be passed soon, will make electric cars substantially cheaper for fleets, businesses and vehicles procured through novated leases. This guide investigates the potential financial benefits of procuring an electric car through a novated lease.

The legislation for the Labor Government’s ‘Electric Car Discount’ is expected to be approved when Parliament sits at the end of July. Chris Bowen, Minister for Climate Change and Energy, has confirmed the changes will retrospectively apply from 1 July and will be reviewed in three years.

EDITOR’S NOTE: This is an informative guide only. We recommend you seek advice from a qualified accountant before you make financial decisions.

This guide will cover:

🔎 An overview of novated leases and salary packaging;

⚡ How novated leases and salary packaging will work with electric cars;

💰 How you’ll save money; and

🆚 A cost/benefit comparison of novated leases versus other financing options.

Novated Leases Explained

The terms novated lease and salary sacrifice are often used hand-in-hand. They operate together, but in different ways to achieve the end goal of reducing your income tax. When it comes to cars, one typically does not exist without the other.

  • Salary sacrifice (or packaging) is the mechanism that reduces your income tax.
  • A novated lease is the financing part of it.

A novated lease is a three-way car agreement between an employer, an employee and a financing company. Under a novated lease you enter into a finance lease and novation agreement which transfers the obligations under the finance lease to an employer. This arrangement remains in place for the duration of the employment.

Your employer takes on the responsibility of the lease payments and operating costs (fuel, service, maintenance, insurance, registration). These are paid for via a salary sacrifice arrangement (explained in the next section) by deducting these expenses from your pre-tax salary.

How a novated lease works diagram

Like any lease or loan, it enables the purchase of a car by spreading the cost over multiple scheduled repayments. Car lease terms typically range from 3 to 5 years.

Key things to know about novated leases:

  • Underlying interest rates can be higher than other financing options
  • Additional management fees are payable to the novated lease provider

Salary Sacrifice Explained

Salary sacrifice or packaging are used interchangeably and basically mean the same thing. It is an arrangement that allows an employee to receive part of their income in another form — like shares, child care costs, car expenses — rather than as wages or salary.

Salary sacrifice options often feature in employee benefits programs as it provides opportunities for employees to potentially reduce their income tax.

In the case of motor vehicles, salary sacrifice works by ‘sacrificing’ the lease repayment and operating expenses from your pre-tax income dollars. This lowers your taxable income, reduces your income tax and increases your take-home pay. The catch, however, is that fringe benefits tax (FBT) is generally payable on the items that are salary packaged.

How salary packaging works diagram
Image by - Stratton Finance

Whether salary packaging makes sense for you comes down to whether the tax savings offsets the novated lease fees and FBT payable (discussed in the next section).

What is Fringe Benefits Tax (FBT)?

Fringe benefits tax (FBT) is a tax that employers pay on benefits paid to an employee in addition to their salary or wages. Historically this included cars that are salary packaged via novated leases.

FBT is calculated on the taxable value of the benefits you provide. This is separate to income tax.

With respect to salary packaged cars, there is more often than not, a level of private use, which triggers an FBT obligation. According to the ATO, if a car is garaged at or near an employee’s home, it is taken to be available for the employee’s private use and is subject to FBT. FBT is effectively taxing the 'personal' benefit received from the use of the car outside of work purposes. You can read more about FBT works here.

Under Labor’s Electric Car Discount scheme, electric cars that are salary packaged will be exempt from FBT. This means you get the full tax benefit from the deductions without the FBT obligation attached. The chart below compares the tax treatment for a Tesla Model 3 RWD under a novated lease with no FBT obligation versus the traditional treatment. There is an additional tax benefit of $5,714 per annum.

How will Novated Leases and Salary Packaging work under the ‘Electric Car Discount’?

Everything will be the same, except there will no longer be an FBT obligation. This will remove one of the significant costs of a car under a novated lease.

The FBT exemption will apply to electric cars that fall below the luxury car tax (LCT) threshold for fuel-efficient vehicles ($84,916 in 2022-23). Any cars above this value will be subject to the standard FBT treatment in place prior to the introduction of this legislation.

Historically the financial case for novated leases has been a ‘grey’ area as the financial case is not straightforward. In general, the following rule of thumb applies:

Novated leases generally make more financial sense the higher running costs and your level of income, which increases the amount of income tax that can be offset.

There are many instances where you would be financially worse off on a novated lease compared to an outright purchase.

Novated lease financial case with FBT exemption

With the abolishment of FBT for EVs, the financial case will most certainly be in favour of a novated lease compared to other financing options (we recommend you seek advice from a qualified accountant before you make this decision). It will no longer be a matter of ‘if’ there will be savings but ‘how much’ those savings will be.

Novated Lease EV Case Study

To quantify the benefit of an FBT exemption under the Electric Car Discount, we’ll compare an FBT-exempt novated lease to other finance options.

Jane works in Business Development for a New South Wales (NSW) based company.

  • Drives 15,000 km per annum
  • Earns $100,000 gross income per annum
  • Procure a Tesla Model 3 RWD ($63,900 MSRP) through a novated lease and a salary packaging arrangement with her employer.

We have compared the costs of procuring the Model 3 through various finance arrangements over three years below:

In this situation, the financial case for a traditional novated lease (with post-tax contribution) does not stack up for Jane. She would be at least $1,755 better off purchasing outright. In the event, she required financing, a novated lease with post-tax employee contributions would provide a slightly superior outcome compared to drawing under her mortgage.

Under the Electric Car DIscount, which exempts FBT, after three years, she would be $12,166 better off compared to an outright purchase. The exclusion of FBT substantially improves the affordability of an electric car under a novated lease.

The chart below provides a detailed breakdown of the costs and benefits across the different finance options over a three-year period. The big swing factor for novated leases under the Electric Car Discount is the absence of FBT.

Electric vs. Petrol - Which is Cheaper Under the Electric Car Discount?

petrol vs electric

One of the main criticisms of electric cars is the higher upfront cost. While we are at a point where the total cost of ownership of an electric car is often lower than its petrol equivalent, for many, this is not enough.

How would this total cost of ownership look when viewed through the lens of a novated lease? To give you an idea, we’ll compare the Tesla Model 3 from the above case study to a Toyota Camry Hybrid, which is $17,000 cheaper (28%) at $46,990 before on-road costs.

Key insights:

  • The savings from the FBT exemption (~$5k) brings forward the time to recoup the ‘electric premium’ by ~20 years to 3.1 years
  • Over 5-years, an additional $11.3k of savings are realised.

In terms of monthly payments, we've outlined the expected monthly payments for both vehicles below. Despite costing more, the Model 3 has a lower upfront payment due to the absence of FBT.

How You can Access an Electric Car Novated Lease?

Enquire with your employer whether it has novated lease/salary packaging arrangements in place. There will typically be a single provider who provides the financing as well as managing the payments and reporting for the novated lease.

Smaller businesses may not have an arrangement in place as typically novated leases have been a niche offering in the landscape of vehicle finance. There should be nothing precluding your employer from setting up a novated lease program. It is however up to their discretion.

Existing EV incentives and the Electric Car Discount

We reviewed the information on all state government websites around eligibility for state-based EV incentives under the electric car discount. Only the NSW government has explicitly stated that the $3000 rebate will not be available for cars procured via the Electric Car Discount scheme. For more information on the EV incentives available to your state, refer to our state-by-state guide.

How Can You Access an Electric Car Novated Lease?

As noted earlier only electric cars that fall under the luxury car tax (LCT) threshold of $84,916 for 2022-23 will be eligible. The LCT threshold typically includes; options, accessories, dealer delivery, and GST.

At the time of writing, 28 out of the ~60 electric car models available for sale, will be eligible for the FBT exemption.

DISCLAIMER: zecar is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances.

zecar is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.

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