Vehicle Leasing: The Pros and Cons Explained

Vehicle Leasing: The Pros and Cons Explained — Especially for Salary Sacrifice 

In most cases, a car loan is a better option than a novated lease - speak to us and we will analyse the best option for you.

Leasing a vehicle has become a popular option in Australia, particularly among employees looking to reduce their tax through salary sacrificing. Promoted as a smart way to drive a new car while saving on income tax, vehicle leasing—especially via a novated lease—can indeed have advantages. But it’s not a one-size-fits-all solution. In most cases the alternative, a car loan, is a more economical and flexible option. Below is a breakdown of the pros and cons so you can make an informed decision. Interest rates, repayments, and running costs included in a lease often negate the tax benefits and therefore, more often than not, is more costly than a loan. Speak to us about your options.

What is Vehicle Leasing? 

In a lease arrangement, you don’t own the car—you’re effectively renting it for a fixed term, usually 2 to 5 years. With a novated lease, your employer makes lease payments on your behalf from your pre-tax salary. This is the common structure used in salary sacrificing. 

✅ Pros of Vehicle Leasing 

1. Tax Savings via Salary Sacrifice 

• Primary attraction: Lease payments, running costs (fuel, servicing, insurance, rego), and even tyres can be bundled into one pre-tax payment. 

• This reduces your taxable income, potentially dropping you into a lower tax bracket. 

• Especially effective for middle-to-high-income earners. 

2. Access to a Newer Vehicle 

• You can drive a new or near-new car without a large upfront purchase or loan. 

• Cars are typically under warranty, reducing maintenance risks. 

3. Budget Certainty 

• Fixed, predictable monthly payments. 

• Most leases bundle vehicle running costs, making it easier to manage household cash flow. 

4. Fringe Benefits Tax (FBT) Benefits 

• Thanks to the Employee Contribution Method (ECM), making a portion of your lease payments with post-tax dollars can reduce your FBT liability to zero. 

5. No GST on Purchase Price 

• For novated leases, you may not have to pay GST on the purchase price of the car, which can save thousands. 

❌ Cons of Vehicle Leasing 

1. You Don’t Own the Car 

• At the end of the lease, you either return the car or pay the residual value (balloon payment) to keep it. 

• The residual is set by the ATO and may be higher than the market value of the vehicle. 

2. Not Always Cost-Effective 

• If you drive infrequently or choose a car with high depreciation, you may end up paying more over time. 

• The packaged running costs can be inflated compared to real expenses. 

3. Salary Sacrifice Isn’t Free Money 

• You’re still spending your income, just in a tax-advantaged way. 

• If your employment ends or changes, you’re liable for the lease. 

• Some people overestimate the tax benefit and underestimate the long-term cost. 

4. Limited Flexibility 

• Leases come with usage caps (e.g. kilometre limits). 

• Early termination can result in hefty break fees. 

5. FBT Risk for Personal Use 

• The ATO treats leased vehicles as fringe benefits if used for personal driving. 

• Incorrectly managing the FBT component can lead to unexpected tax liabilities. 

🚫 Common Misconception: “It Saves Me from Paying Maximum Tax” 

Many employees are sold on novated leases under the belief that they’ll significantly reduce their income tax. While there can be tax advantages, the real savings depend on: 

• Your income bracket 

• Your choice of car 

• Your driving habits 

• Your understanding of residual value and fees 

Some people save money. Others end up paying more over the life of the lease than if they had simply bought a modest second-hand car outright. 

✅ Who Might Benefit Most? 

• Full-time employees earning $70,000+ per year 

• People who want to regularly upgrade to new cars 

• Drivers who log consistent annual kilometres 

• Those who value budgeting certainty and convenience 

❌ Who Should Think Twice? 

• Casual or contract workers (employment instability is risky) 

• People who drive infrequently or short distances 

• Those who prefer ownership over convenience 

• Anyone close to retirement or a career change 

Vehicle leasing through salary sacrifice can offer real tax and budgeting benefits—but it’s not a magic bullet. It’s essential to crunch the numbers, understand the fine print, and consider your personal and financial goals.

If you are considering purchasing a vehicle (for personal or business use), speak to us about your financing options.

Currently have a vehicle loan or lease? Contact us and we’ll do the analysis to determine if you could do better.