Considering a novated lease for your next car? We break down whether it’s worth it, explore the key pros and cons, and reveal flexible alternatives that might better suit your needs.
Novated leases have been a popular vehicle financing option for Australian employees, but with changing tax rules, rising interest rates and new mobility solutions emerging, many are asking: is a novated lease still worth it?
Whether you’re weighing up the tax benefits against the restrictions, or wondering if there’s a more flexible way to access salary packaging benefits, this guide covers everything you need to know to make an informed decision.
What is a novated lease?
A novated lease is a three-way agreement between you, your employer, and a finance company. Your employer makes the lease payments from your pre-tax salary, potentially reducing your taxable income. You get to use the car for personal and work purposes, while your employer handles the administrative side.
The arrangement typically includes running costs like insurance, registration, servicing, and fuel bundled into one monthly payment.
Is a novated lease worth it? The short answer
Traditional novated leases can offer tax benefits, but they come with significant limitations. While the salary packaging advantages remain attractive, the employment dependency, inflexibility and complex terms often outweigh the benefits for many Australians.
Traditional novated lease pros and cons
Pros of traditional novated leases
Tax benefits
- Payments come from pre-tax salary, reducing taxable income
- GST savings on the vehicle purchase price and running costs
- Potential fringe benefits tax (FBT) exemptions for certain vehicles
Administrative simplicity
- Employer handles lease payments and some administrative tasks
- Access to fleet pricing through lease providers
- Potential bulk insurance discounts through employer programs
Predictable budgeting
- Fixed monthly costs make budgeting easier
- Protection against unexpected maintenance expenses (if included in package)
- Clear salary sacrifice amounts for tax planning
Cons of traditional novated leases
Employment dependency
- Lease is tied to your current job – changing employers complicates arrangements
- Risk of having to pay out the lease if you lose your job
- Not all employers offer novated lease programs
Limited flexibility
- Locked into long-term contract (typically 3-5 years)
- Restrictions on vehicle modifications
- Mileage limits and excess kilometre charges
- Difficulty cancelling or changing arrangements mid-lease
Hidden costs and complexity
- FBT may apply, reducing tax benefits
- Administration fees and setup costs
- High residual payments are often required at lease end which might land you in negative equity.
- Complex calculations make true costs hard to determine
Vehicle ownership issues
- You never own the vehicle during the lease term
- Wear and tear charges at lease end
- No equity building
- Must maintain comprehensive insurance
Many people are now seeking alternatives – whether you’re looking for a smarter car lease in Sydney, Melbourne or Brisbane, these limitations are driving the search for more flexible solutions.
Why traditional novated leases fall short today
Traditional novated leases were designed for a different era of work and mobility. While they still offer tax benefits, several factors make them less suitable for modern Australian workers. Car subscriptions on the other hand are a flexible novated lease alternative.
The problem with traditional novated leases
1. Employment dependency risk Your lease is tied to your job. Change employers, lose your job or move to contracting work, and you’re stuck with complex arrangements or potential pay out obligations.
2. Rising costs, diminishing benefits Higher interest rates have increased financing costs, while recent FBT rule changes have reduced tax benefits for many vehicles, particularly luxury cars and some electric vehicles.
3. Inflexibility when you need it most Locked into 3-5 year contracts with limited ability to upgrade, downgrade or adapt to changing circumstances. Perfect for the past, but not for today’s dynamic work environment.
4. Limited vehicle access Restricted to what lease providers offer, often missing out on the latest models, competitive pricing, or the specific vehicle that suits your needs.
When traditional novated leases might still work
Traditional novated leases can still make sense if you:
- Have a stable, long-term job with an employer offering the program
- Are in a higher tax bracket where the savings are substantial
- Prefer predictable costs and don’t mind being locked in
- Drive high kilometres for work and can claim FBT exemptions
However, most Australians today need more flexibility than traditional novated leases provide.
Expert insight: The evolution of vehicle access
Laura Harewood, CRO of Karmo, shares her perspective on the changing landscape:
“Traditional novated leases were designed for a different era of work and mobility. While they still offer tax benefits, the employment dependency and inflexibility don’t match how people live and work today. Subscriptions on the other hand ensure you’re in control.. Whether you’re changing jobs, wanting to upgrade your vehicle, or simply don’t want to be locked into a 3-5 year commitment, subscriptions give you options that traditional finance or novated leases simply can’t match.”
Modern alternatives to traditional novated leases
Car subscription – The best of both worlds
Karmo’s car subscriptions solve the main shortfalls of traditional novated leases.
All-inclusive convenience: One monthly payment covers car, insurance, registration, and maintenance.
- Employment flexibility: Independent of your employer – meaning easier transition between jobs
- Shorter commitments: More flexible terms than traditional 3-5 year leases
- No balloon payments: Avoid complex end-of-lease calculations, and remove the depreciation gap risk
- Upgrade options: Swap and upgrade vehicles as your needs change.
For business users, car subscriptions can often be tax-deductible while providing much more flexibility than traditional novated leases.
Traditional car loans
- Build equity in the vehicle
- Give you full ownership and control
- No employment restrictions
- Often lower total cost over time
Smarter car lease alternatives
If you’re exploring vehicle financing options and looking for a smarter car lease in Sydney or Brisbane, car subscriptions provide the convenience of traditional leasing with modern flexibility.
Rent-to-own alternatives
If you’re looking for a rent-to-own cars alternative in Melbourne, Sydney, Brisbane, or Perth, car subscriptions provide more flexibility without the commitment to eventual ownership.
Operating Leases for Businesses
If you’re self-employed or run a business, an operating lease might provide similar tax benefits without employer dependency.
Making the right choice for your situation
When evaluating your options, ask yourself:
- Are salary packaging benefits my only priority? If yes, car subscriptions don’t give you tax advantages with modern flexibility, this is not your answer.
- How stable is my employment? Car subscriptions are designed for job mobility, unlike traditional novated leases that can complicate career changes.
- How important is flexibility to me? If you value the ability to change or upgrade vehicles, car subscriptions adapt to your changing needs.
- Do I want simplicity? Car subscriptions eliminate the complexity of traditional arrangements while maintaining the benefits.
The Bottom line
Traditional novated leases offer tax benefits but come with significant limitations that don’t suit modern work patterns. The employment dependency, inflexibility, and complexity make them less attractive than they once were.
Karmo’s subscriptions offers an alternative with flexibility and convenience. You get clear financial visibility without sacrificing adaptability.
If you’re looking for a smarter car lease in Sydney or Brisbane, or exploring long-term car rental alternatives in Perth, Karmo’s subscriptions provide the perfect offer of modern flexibility.
Before making any decision, we recommend:
- Getting personalised tax advice from a qualified accountant
- Exploring how car subscriptions work for your situation
- Considering your career plans and flexibility needs
