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Why “tax saved” is the wrong way to evaluate a novated lease

One of the most common ways novated leases are marketed is via a single headline number:

“Tax saved”

Or sometimes, more insidiously:

“Savings”

At face value, this sounds sensible. Tax is a real cost, and paying less tax feels synonymous with being better off.

The problem is that “tax saved” is not a measure of whether you are better off.

On its own, it is a misleading and incomplete metric.

The printer analogy

Consider the following scenario.

A person on the top marginal tax rate walks into Officeworks to buy a printer.

  • There is a $300 printer that meets their needs. They know that if they buy it outright, they can claim it as a tax deduction, and at a 45% marginal tax rate plus 2% Medicare levy, they will receive 47% × $300 = $141 back as a tax refund.
  • The salesperson instead recommends a leasing arrangement, where they pay $12 per month over three years and own the printer outright at the end.
  • Their argument is:

    “You’re on the top marginal tax rate.

    When you claim all your leasing costs on tax, you will save
    47% × 3 years × 12 months × $12 = $203.04 in tax!

    Wouldn’t you want to save over $200 in tax?”

That statement is technically true.

However:

  • In the cash purchase scenario, the total post-tax cost is
    $300 − $141 = $159.
  • In the printer-leasing scenario, the total post-tax cost is
    3 × 12 × $12 − $203.04 = $228.96.

You did not save money.

You saved more tax, but you paid more and are poorer.1

This is exactly the error that occurs when novated leases are evaluated only on “tax saved”.

Tax saved is a discount

It is more accurate to think of tax saved from spending pre-tax income as:

an effective discount applied to spending

For example, if you spend $1,000 of pre-tax income and your marginal tax rate is 30% plus 2% Medicare levy, the reduction in income tax means the net financial effect is equivalent to spending $680 after tax. In other words, it is as if you have received a 32% discount.

Similarly, at marginal tax rates of 37% or 45%, spending pre-tax dollars is equivalent to receiving an effective 39% or 47% discount, respectively. (This is the fundamental reason why higher tax bracket earners derive the most saving from novated leases overall.)

However, a discount is only beneficial if the discounted price is lower than the best alternative.

A 32%, 39%, or 47% discount does not automatically make something good value, especially if:

  • the base price is excessively inflated, or
  • the bundled package includes things you would not otherwise buy.

Paying more to save tax is not necessarily a win even when the number works

If a novated lease arrangement results in:

  • higher interest costs,
  • additional fees,
  • bundled insurances you would not otherwise buy,
  • worse outcomes for super, childcare subsidies, or borrowing capacity,
  • reduced job or life flexibility

then it is entirely possible to:

pay $40,000 extra in order to “save” $39,000 in tax,
while also accepting multiple non-financial downsides.

In that situation:

  • the tax saving is real,
  • the numerical position may even be marginally positive,
  • but the overall trade-off may still be unattractive.

The relevant question is net financial position and non-financial costs, not tax saved in isolation.

How novated lease quotes exaggerate “savings”

Many novated lease quotes and calculators present impressive-looking “savings” figures.
These figures are often technically defensible, but analytically weak.

The core issue is not arithmetic; it is the choice of benchmark.

The baseline problem

Many novated lease quotes implicitly assume the following comparison when presenting ‘savings’ figures:

“If you didn’t novate, you would have leased the car using the same fee structure, funded with post-tax income.”

This is a poor and unrealistic baseline.

For most people, realistic alternatives include:

  • a competitively priced car loan (e.g. ~6%)
  • cash held in an offset account
  • buying a cheaper or used vehicle
  • keeping their existing car

Comparing a novated lease against a deliberately inferior alternative will almost always make the novated lease appear attractive.

However, this does not answer the question most people actually care about:

Am I better off compared to what I would realistically do otherwise?

A comparison against a strawman benchmark is analytically meaningless.

How calculators turn weak benchmarks into big “savings”

Most novated lease calculators and quotes then amplify this weak baseline by:

  • highlighting tax savings prominently (without clarifying that this is not net overall saving),
  • bundling in insurances, warranties, and add-ons with embedded commissions,
  • downplaying financing costs, opportunity cost, and residual payments,
  • and glossing over caveats behind generic disclaimers such as “please consult a financial adviser”.

None of this is illegal.

But taken together, it systematically biases the comparison toward a favourable-looking but misleading outcome.

Why this matters

A novated lease can show large “tax savings” while still resulting in:

  • poorer net worth outcomes,
  • reduced borrowing capacity for wealth-building,
  • loss of job flexibility,
  • potential financial loss during early termination events,
  • or increased liabilities elsewhere through means testing.

In such cases, the saving is real only relative to a bad benchmark, not relative to the decision you would otherwise make.

That is why defining the correct benchmark is more important than the headline saving itself.

For a discussion of how to frame this comparison properly, see
Is it worth it? — savings and frame of reference.

What you should compare instead

The correct question is not:

“How much tax do I save?”

The correct question is:

“Compared to my best realistic alternative, am I financially better off overall?”

That requires comparing:

  • the same car,
  • over the same time period,
  • under the same usage assumptions,
  • against realistic alternatives,
  • across cashflow, assets, and liabilities.

This is what the novated lease spreadsheet sets out to achieve.

Key takeaway

If you remember nothing else:

Tax saved is only one small part of the overall financial outcome.

A novated lease can be worthwhile if:

  • the total cost is lower than your best alternative, and
  • the risks, trade-offs, and constraints suit your situation after careful consideration.

Optional Support

Both this guide and the spreadsheet are free. If they prove helpful, consider:

  1. A more complete comparison would also incorporate the opportunity cost of not paying cash upfront in the leasing scenario. This is omitted here for simplicity. ↩