Novated Leasing – Is it right for you?

Man driving a car
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Having a car is almost essential here on the Central Coast. For work, the school run or getting away for the weekend, a car provides no greater freedom. That freedom though comes at a cost. Not just car loan repayments but also the ongoing running costs. Novated leasing, a uniquely Australian perk, is designed to soften some of the financial blow of car ownership.

It’s probably not the first time you’ve heard of Novated Leasing. A bit like SMSF’s, those that have taken the plunge into Novated Leasing are often all too willing to talk about it, particularly at family BBQs! If you’ve previously just nodded along or not given novated leasing much thought, then this article is for you.

Car ownership costs in Australia

Costs of owning a vehicle are staggering. Excluding the purchase price, when you combine insurance, rego, fuel, maintenance, parking, tolls and (gulp) fines, the cost of running a car in and around Sydney can be up to $400 per week.1 That’s almost equal to the average Australian mortgage! And, unlike most homes, a vehicle almost always loses value over time.

The cost of running a car in Australia can be up to $400 a week.

What is a Novated Lease?

A ‘lease’ simply means to rent, and ‘novate’ means passing responsibilities for payment to a third party. So, a novated lease is when an employer pays for the leasing of a vehicle on their employee’s behalf. In Australia, the employer can use the employees ’pre-tax’ income to make car leasing payments. This potentially makes the costs of car ownership tax-free.

What are the Benefits of a Novated Lease?

Employee Benefits

  • Upfront purchase costs are reduced - no deposit is required, only the leasing payments and relevant fees.
  • Vehicle running expenses can be included - a fully maintained lease can also cover the running costs of the vehicle under the same pre-tax conditions.
  • Employees taxable income is lower - meaning less income tax is paid each year.
  • Avoid resale risks - The vehicle can be replaced every few years with a new car.
  • No restrictions - you can choose the car you want and use it for any purpose.

Employer Benefits

  • Recruitment - a way to effectively offer employees a higher salary.
  • Improved cashflow - less cash is tied up in a depreciating fleet of vehicles.
  • Retention - an employee needs to stay with their employer to keep the pre-tax benefits of the novated lease (however a lease can be transferred to another willing employer).

What are the drawbacks of a Novated Lease?

Employee drawbacks

  • You need to remain an ‘employee’ - If you leave your employer the ‘novated’ part of the lease ends but the you the employee is still responsible for the ongoing lease unless it can be transferred to another employer.
  • You don’t own the car - meaning you can’t make major modifications and the car must be in a reasonable condition to return at the end of the lease.
  • Fringe Benefits Tax - a novated lease is an employee benefit and can incur fringe benefits tax in some circumstances.

Employer drawbacks

  • Administration - Distributing your employee salary payments between the employer and a leasing company requires some more overheads to administer.

Types of Novated Leases

The type of novated lease you take can significantly change the costs and benefits depending on your own situation. These are the main options:

  • Novated operating lease - You return the car at the end of the lease period and are then free from further obligations, so long as the car is in a reasonable condition with normal wear and tear.
  • Novated finance lease - You agree to the market value of the car at the end of the lease and if it is less than market value you (not your employer) need to pay the difference.
  • Fully-maintained operating lease - all the vehicles running costs, including fuel, are included under the same pre-tax arrangement as the lease payments.
  • Non-maintained operating lease - you must pay for maintenance and running costs out of your regular after-tax salary.

Whether or not a novated lease is for you is both a personal and financial decision. If you like having a new car replaced every few years, you plan to stick with the same employer for a while and you need to reduce your tax bill then novated leases might makes sense. On the other hand, if you change employers regularly and happy to pay upfront for a second-hand car and normally get a tax refund, then it might not make as much sense. Either way, it pays to get the right advice.

Saige Accounting & Financial Planners know the financial needs of the Central Coast. We can talk to you about the specific personal tax benefits and fringe benefits implications. We can also help you work out a long-term financial plan and if novated leasing forms part of that plan. Talk to us to discuss your novated leasing needs.

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