How a Novated Lease for Small Business Saves You Thousands?
As a small business owner or self-employed professional, managing expenses is key to maintaining profitability. One area where significant savings can be found is in the purchase and running costs of vehicles. Many business owners aren’t aware that novated leasing—commonly used by employees—can also offer a range of financial and tax benefits to those who run their own business.
If you pay yourself a salary, novated leasing could be a smart way to finance your next vehicle and lower your tax bill. Here’s how it works and how it can benefit your business.
What is Novated Leasing?
Novated leasing is a tax-efficient way to finance a vehicle by packaging the lease payments and running costs through your pre-tax salary. It’s a three-way agreement between you (the employee), your business (the employer), and a finance provider. For small business owners or self-employed professionals who pay themselves a salary or wage, novated leasing offers the opportunity to lease a vehicle and deduct the costs before tax is applied, significantly lowering your taxable income.
Novated leasing is not just for employees of large corporations; as a small business owner, you can use it to your advantage. Even better, it’s possible to salary package a vehicle for yourself or for a family member, like a spouse, even if they are not employed by the business.
Tax Benefits for Employees in a Small Business with Novated Leasing
One of the biggest draws of novated leasing for small business owners is the potential for tax savings. By leasing a vehicle through a novated lease, you can:
- Reduce your personal taxable income: Since the vehicle costs, including lease payments and running costs (fuel, insurance, maintenance), are deducted from your pre-tax salary, you end up paying less income tax each year. For business owners in higher tax brackets, this can result in thousands of dollars in savings.
- Bundle running costs for even more savings: All the essential running costs of the car can be packaged into the lease, including fuel, servicing, tyres, insurance, and more. By paying these costs pre-tax, you save on both GST and income tax, further reducing your overall expenses.
- Claim business-related expenses: If the vehicle is used for both business and personal purposes, you can claim the business use percentage of the running costs as a deduction. This is particularly beneficial for self-employed professionals who use their vehicle for work-related travel or deliveries.
These tax advantages are especially significant for business owners whose personal income tax rate is higher than the company tax rate. Salary packaging vehicle costs through novated leasing offers bigger savings than running those expenses through the business books.
Personal vs. Business Use of Novated Leasing
Small business owners often use vehicles for a mix of personal and business purposes. With novated leasing, you can easily finance a car that serves both needs, without the complexities of traditional vehicle finance options.
If your vehicle is used more than 50% for business purposes, the tax benefits increase significantly. In this case, you can still deduct the business-related running costs as usual, but you’ll also enjoy the personal tax savings from salary packaging the vehicle.
For those with vehicles that are mostly used for personal use but occasionally for business, novated leasing still makes financial sense because of the pre-tax savings on running costs. And since the lease is tied to your salary rather than business revenue, it keeps the arrangement simple and flexible.
Why Novated Leasing is Better Than Traditional Vehicle Financing
Novated leasing offers several advantages over traditional car loans, especially for small business owners and the self-employed. Here’s how it compares:
- Tax Savings: Unlike car loans where you pay the vehicle costs using after-tax dollars, novated leasing allows you to pay with pre-tax income, lowering your taxable income and saving you money.
- Simplified Budgeting: Novated leasing bundles the lease payments and running costs into one simple payment. This makes it easier to manage cash flow and avoid unexpected expenses, as everything from fuel to maintenance is covered in the salary deductions.
- Flexibility: With novated leasing, you can choose a lease term that suits your financial goals, typically between 1 to 5 years. At the end of the lease, you have options: you can trade the car in for a new one, buy it outright by paying the residual value, or extend the lease.
By comparison, traditional car loans often lack the same level of flexibility, and you miss out on the pre-tax savings offered by novated leasing.
Novated Leasing for Family Members
One often-overlooked advantage of novated leasing for small business owners is the ability to salary package vehicles for family members, such as a spouse or partner, even if they are not directly employed by your business.
This is particularly useful if your spouse requires a vehicle for personal use, as you can structure the lease in such a way that allows you to enjoy the tax benefits of salary packaging, while providing the vehicle to a family member. It’s a smart way to maximise the financial benefits of novated leasing beyond just your own personal vehicle.
Electric Vehicles: Extra Savings for Small Business Owners
If you’re considering an electric vehicle (EV) for your business or personal use, novated leasing offers even more advantages. Recent changes in Australian tax law mean that novated leases for certain electric vehicles are now exempt from Fringe Benefits Tax (FBT), providing substantial additional tax savings.
For small business owners who want to make environmentally-conscious choices while also saving money, this FBT exemption makes novated leasing an especially attractive option. On top of the usual savings, you avoid paying FBT, making the overall cost of owning an electric vehicle significantly lower.
Flexibility and Simplicity of Lease Management
One of the challenges small business owners face is the administrative burden of managing business expenses. Novated leasing can help reduce that burden. With One Car Group, the entire process is managed for you—from lease setup, to payroll deductions, to handling all running costs.
The simplicity of novated leasing means you don’t have to worry about juggling different payment schedules for fuel, insurance, or servicing. Everything is bundled into your lease, and One Car Group takes care of paying the suppliers on your behalf. This streamlined approach allows you to focus on running your business rather than managing vehicle expenses.
Conclusion
For small business owners and self-employed professionals, novated leasing provides a flexible and tax-efficient way to finance vehicles while enjoying significant savings. By paying for your car and its running costs with pre-tax income, you can reduce your taxable salary and keep more of your hard-earned money. Whether you use your vehicle for business or personal purposes, novated leasing offers a smarter way to manage your vehicle expenses.
If you’re ready to explore how novated leasing can benefit your business, Contact One Car Group today for a free 30-minute consultation and find out how novated leasing can help your small business save on vehicle costs and taxes.
