How do novated lease tax deductions work?
3:50 minute read
If you’re looking to make getting into a new car easier and more affordable, a novated lease could bring some serious tax savings. But how do novated lease before-tax and after-tax deductions work? And how could a novated lease help lower your taxable income?
Oly breaks it all down, minus the jargon - with some straight-up examples to show what your before-tax and after-tax contributions might look like.
Key takeaways
First up, what’s a novated lease?
A novated lease is an ATO-approved way of salary sacrificing a car. Basically, your employer pays your novated lease using a mix of your pre- and post-tax salary - which could equate to some serious tax savings! And because your car and eligible running costs are bundled into one neat regular payment, you have less bills and admin to worry about.
Get the tax saving opportunities without the ATO rigmarole
With a novated lease, you could enjoy the tax benefits without having to jump through ATO hoops at tax time:
- By taking part of the payment from your before-tax salary, you could reduce your taxable income and potentially save thousands of dollars in tax, without having to manually claim every expense come tax time.
- Or if you use a novated lease to score an eligible electric car ALL of the payment comes from before-tax salary, meaning there could be stacks more savings.
- Plus, there may also be no upfront GST cost to you on your new car (up to the savings threshold of $6,334, anyway) and you could benefit from GST savings on running costs - sweet!
How do novated lease deductions work at tax time?
With a novated lease, you can’t claim payments as a deduction in your tax return because the before-tax payments come out each pay cycle. So, when tax time rolls around, any tax benefits have already been factored in.
Your payslips and income statement will show any reductions in your taxable income, which rolls straight through to your tax return. And the beauty of that is:
- You could owe less tax
- Or you could get a sweet refund if too much tax was withheld!
What about claiming running costs in your tax return?
Most of your car’s running expenses - fuel, rego, insurance, servicing, tyres, and even EV charging - are built into your novated lease, so you can’t claim these at tax time.
Before-tax vs after-tax deductions: what’s the deal?
Under ATO rules, a novated lease counts as a fringe benefit - which can trigger the not-so-fun fringe benefits tax (FBT). A fringe benefit is a perk your employer gives you in a different form to salary - like a car, laptop, or even a gym membership. It’s something extra you get for doing your job that’s not cash salary or wages.
To keep the FBT monster at bay (or get rid of it completely), Oly uses a nifty trick called the employee contribution method (ECM).
Here’s how it works:
- Before-tax contributions are taken from your gross salary before income tax is calculated. This is where the tax savings could kick in.
- After-tax contributions are taken from your net pay, after tax is calculated. This helps cut the risk of incurring an FBT liability.
Basically, the employee contribution method helps offset any FBT you might owe on your novated lease. By chipping in with a mix of before- and after-tax payments, you shrink the car’s taxable value which means reducing FBT to $0 at the end of the FBT year (31 March).
How do novated lease contributions work for an electric car?
When you get into an eligible electric car with a novated lease, you can skip FBT completely - all thanks to a nifty government perk called the EV Discount. That means 100% of your novated lease payments can come from your before-tax salary to really max out any possible tax savings - cha-ching!
How an Oly novated lease makes things super simple
Have your car and (most) running costs bundled into one nifty regular payment, meaning less bills and zero late payment reminders!
Oly will work with you and your employer to help get your novated lease set up. From sign up and setting up your automatic salary deductions, you’ll have everything in place to get the most out of your pay.
And thanks to Oly’s handy app, you can submit claims, check your budget and make changes to your account anywhere, any time.
Ready to drive?
You don’t need to work for a big company to get big benefits, but to be eligible for an Oly novated lease you do need to be:
- Employed full-time, part-time or self-employed
- Earning a set salary (AKA not unemployed, retired, or a ride share driver)
- Looking for a car for personal use
Fill out this form to kick things off, then check your inbox for a link to create your Oly login to apply online (hint: check your spam/junk folder).
Things you need to know
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