Novated Lease Pros And Cons
Weighing up your novated lease pros and cons is essential. Read our guide to compare its advantages and disadvantages side by side.
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Novated Lease pros and cons
Weighing up your novated lease advantages and disadvantages
Committing to any car finance is a relatively long-term deal, so you should always weigh up your options. Just like car loans are ideal for many car buyers, and chattel mortgage car finance works great for some sole traders, novated leases can turn out remarkably well for some full-time employees that have access to a salary sacrifice option through their employer. Different factors influence whether one will work for you, and we're going to examine all of them here. One thing is for sure, though. Novated leasing is a unique form of car finance which can offer huge tax advantages in the right circumstances, so it's a great place to begin considering your car finance options.
Sourcing a novated lease through Savvy makes sense
Novated lease car finance is a three-way agreement between you, your employer (if novated lease is part of your employment package), and a finance company. It's a form of salary sacrificing that allows you to run a car from pre-tax earnings, which means you pay less income tax. Many employers don't stick with a single salary packaging provider and let you source one yourself – which is an excellent thing. That's because, like all areas of finance and business, competition means better deals – and that's where Savvy comes in. When you shop for a novated car lease via Savvy, you get access to some of Australia's most competitive lenders and options.
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Advantages and disadvantages of novated leasing
PROS
Lower taxable income
Depending on the car's value, one of the primary benefits of a novated lease is going to be the fact you'll pay less income tax. Let's say you earn $100,000 a year and choose to pay $1,000 per month for a fully maintained novated car lease. That means your taxable income drops by $12,000 to just $88,000 during the three-year term. At the current tax rate of 32.5%, that equates to a substantial income tax saving.
The fixed running costs of a novated lease car
Novated lease companies can bundle all the costs of running a vehicle into your fixed monthly payments. That means you know precisely what's coming out of your pay every time. Servicing, registration, even fuel can all be salary packaged by a novated lease company – meaning fully maintained novated leases also equal full peace of mind.
Access to GST-free novated lease cars
Novated leasing is a three-way affair, meaning different parties get various benefits from the deal – but some of the benefits the leasing company gets are passed on to you. The main thing to note here is GST on the purchase price of the vehicle. When the novated lease company buys the car, they get to claim the GST back, so you get charged on the vehicle's cost before GST gets added. Novated leasing is probably the only way you can access ex-GST rates with non-business car finance – and it represents a significant saving. On a $40,000 vehicle, for instance, that equates to $3,600 of your hard-earned money . Go higher end and buy a $100,000 car, and you’re saving more than $9,000 for no other reason than because you chose a novated lease – and that’s before you take any other savings into account.
Access to better car prices with a novated lease
When your novated lease provider goes to buy your car, they're bringing a lot of buyer power to the negotiating table. That's because lease financiers often purchase thousands of vehicles each year, which equals discounts from manufacturers.
The benefit of cheaper servicing costs with a novated lease
All those cars need regular servicing, and that's another area where more discounts arise. Novated lease providers manage so many vehicles every year, and they all come with regular maintenance schedules. Because of that volume, lease companies tend to pay far lower servicing rates than private individuals.
You can choose to pay some of the costs from your net earnings
As we'll read about a little later, Fringe Benefits Tax can reduce some of the savings to be gained from a novated lease, but the good news is you can use the Employee Contribution Method (ECM) to fine-tune your agreement. That's basically a way to weigh up FBT liability and opt to pay for the running costs, for instance, out of take-home earnings rather than pre-tax salary. There are no set guidelines for how much of your novated lease running costs get paid pre-tax, so you can alter your deal to maximise tax savings with the ECM. This will cancel out any FBT liability your package accrues.
CONS
Fringe benefits tax (FBT)
FBT gets paid by your employer, but they're likely to pass the expense onto you during a novated lease. Whenever part of your employment package is a perk (like if you get a company car), the ATO looks to claw back some tax via FBT. The good news is that, as previously mentioned, novated leases are flexible enough so you can use the ECM to lessen the impact of FBT, unlike with a straight-up company car. How you proceed will get defined by the FBT rate compared to your novated lease vehicle's cost.
You don't own a novated lease car
For some people, this will be a decision influencer – for others, not so much. It's important to consider whether or not being the owner of a novated lease vehicle will affect your enjoyment of using the car day to day. If you think that's going to be the case, you could consider a car loan instead. Ultimately though, at the end on the lease you have the option to pay out the residual and take ownership of the asset. Even with a car loan, you never truly own the asset outright until you have made your final payment.
Not every employer offers novated car leasing
Unfortunately, many employers don't offer novated leases – and you'll need to find one that does before you can use this type of lease. Salary sacrificing a car is pretty hassle-free for employers because the novated lease company tends to take care of most of the admin. Salary packaging is also a great (and cheap) way for companies to incentivise and attract employees. When employers don't offer novated leasing, it's likely just a case of them not being so well informed. If your current employer doesn't allow salary sacrificing, it might be a good idea to lobby the benefits.
Your self-assessment tax return gets more complicated
One of the nicest benefits of being in full-time employment is that your tax return is usually relatively simple, and you can complete it yourself. Salary sacrificing can alter that situation, and you might want to consider enlisting a tax agent's help. That being said, tax is an area where getting professional assistance is usually more cost-effective than not, and it can open up savings you weren't aware of previously.
If you lose your job, you keep the car and the payments
When you sign up for a novated lease, you choose a term between one and five years. While that's a great way to distribute the financial burden of running a car over a relatively long period, it also means you get locked into the agreement.
Got some novated lease questions? Here's the faqs
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