Novated Leases Electric Cars Guide (2023)
Electric cars that are procured under a novated lease just became a whole lot cheaper. The Electric Car Discount Bill exempts eligible electric cars from Fringe Benefits Tax (FBT) - removing one of the biggest expenses in a novated lease. This guide investigates the potential financial benefits of procuring an electric car through a novated lease.
EDITOR’S NOTE: This is an informative guide only. We recommend you seek advice from a qualified accountant before you make financial decisions.
Novated Leases Explained
A novated lease is a three-way car agreement between an employer, an employee and a financing company. Novated leases are typically offered by your employer as a perk or benefit similar to staff discounts on various products and services e.g. health insurance, gift cards. You can check whether your company has a novated lease program for employees by searching the intranet or contacting payroll or HR.
The main premise of novated leases is that it reduces the overall cost of car ownership (through various tax deductions) while also operating as a lease. The evolution of taxation rules throughout the years however has resulted in the financial case for cars procured under traditional novated leases to be questionable in many cases.
How Do Novated Leases Work?
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 below) by deducting these expenses from your pre-tax salary.
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 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 works by ‘sacrificing’ the lease repayment and the car operating expenses from your pre-tax income. 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.
To illustrate how this work let's assume your pre-tax monthly income is $10,000 and your lease repayments are $2,000/month. Under salary sacrifice, your pre-tax income will be reduced by the amount of the lease to $8,000 a month. Assuming your tax rate is 30%, you've reduced your monthly tax payable by $600 (30% x $2,000) or $7200 p.a. In many cases however the FBT payable will wipe out most of these tax savings.
The passing of the electric car discount bill now means salary sacrifice electric cars in Australia are now exempt from FBT.
Novated Leases and the FBT Exemption for Electric Vehicles
An FBT exemption is available for electric cars that are both first held and used on or after 1 July 2022. This removes one of the significant costs of a car under a novated lease - fringe benefits tax.
The FBT EV exemption applies to salary sacrifice 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. 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.
With the FBT exemption for electric vehicles, the financial case will most certainly be in favour of a novated lease compared to other financing options. It will no longer be a matter of ‘if’ there will be savings but ‘how much’ those savings will be.
We recommend you seek advice from a qualified accountant before you make this decision.
Is Buying an Electric Car on a Novated Lease Worth It?
Yes, buying (or rather procuring) an electric car through a novated lease will result in tax savings which will reduce the overall cost of owning the car. To illustrate the benefit of an FBT exempt electric car on a novated lease we’ll compare it to other purchase and finance options in the following example.
Jane works as a Sales Representative 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 through her employer.
We have compared the costs of procuring the Model 3 through various finance arrangements over three years below. Note the total costs also reflect the potential tax benefits of each respective option.
The FBT exempt novated lease provides the best financial return for Jane. After three years, she will 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.
Under a traditional novated lease (with or without post-tax contribution), Jane is better off purchasing outright. This is due to the interest costs, lease fees, and FBT payable.
If she requires financing, a novated lease with post-tax employee contributions would provide a slightly superior outcome compared to drawing under her mortgage.
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 is the absence of FBT payable.
We recommend reading this step-by-step breakdown of how you can save money on an electric car novated lease.
Electric vs. Petrol - Which is Cheaper Under a Novated Lease?
Total Cost of Ownership Electric vs Petrol
One of the main barriers of electric car uptake 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, the higher upfront cost still remains a barrier - actual and perceived.
How would the total cost of ownership of an electric car if it was procured through an FBT exempt 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.
- 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.
Monthly lease payments
Using the same case study we've calculated the monthly lease payments of each option. As the Tesla Model 3 has higher upfront costs its lease payments are higher. Once the FBT exemption is accounted for, the net -monthly payments if the Model 3 fall below that of the Toyota Camry. Over the duration of the novated lease, the Model 3 will be cheaper to 'own'.
How You Can I Get An Electric Car Novated Lease?
Enquire with your employer whether it has novated lease or 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.
Electric Car FBT Exempt List
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 EV 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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