Stamp duty for cars explained
When you go to buy a new or used car, you will have to pay stamp duty. But what...
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Looking for car leasing options that suit you?
A car lease is similar to renting a car for a period, usually between 2 and 5 years. There are some different types of car leasing.
Salary packaging with a novated lease
If your employer offers salary packaging for vehicles, a novated lease could be an alternative way to finance your car.
What is a novated lease?
Put basically, a novated lease is car finance option that allows your employer to make lease payments on your behalf from your pre-tax income for the term of a lease (or as long as you're employed). This reduces your taxable income, which in turn, reduces the income tax you pay.
Usually a lease will include operating costs such as registration and servicing as well, and can include Fringe Benefits Tax (FBT) based on a forecast that uses the value of the car and the distance you travel (including for personal use) to determine an amount.
Like other car leases, at the end of the lease term a residual value remains, which is like a lump sum that needs to be paid to the financier. If there is a gap between the residual and what the car is actually worth at the end of the lease time, you will wear it - either as a gain or a loss.
Repayment amounts for a Novated Lease depend on the value of the car lease, the amount deferred to the residual, the loan term and the interest charges. Early lease payments typically go towards the interest charges first so if you do break the lease you may still owe a significant proportion of the car purchase price - possibly more than you can sell it for.
What are the steps involved in a novated lease?
You choose a car and organise a lease through a supplier (or your employer may have a preferred company they deal with).
A Deed of Novation is signed, usually for the term of the lease. This effectively means your employer takes on the obligation of making your lease payments.
Your employer makes your car lease payments on your behalf then deducts these amounts from your salary before they pay you, thereby reducing your taxable income.
When your lease term is up you can either pay the residual in order to own the car outright, trade in the vehicle or refinance the residual with another lease or loan.
Despite your employer making the payments the lease is in your name, so you have the ultimate responsibility for the lease, including if you change jobs and your new employer will not take over the lease payments.
What are the benefits?
It is a good idea to talk to your accountant or a leasing company about your specific situation, however the benefits are generally:
Reduced tax (based on lowering your taxable income)
The opportunity to make money on the difference between the residual and the market value of the car.
Compared to getting a fleet company car, you can choose the car you want, control the maintenance and take the car with you if you switch employers. There are also no restrictions on personal use.
Similar to a novated lease, a standard car lease is like renting a car for the term of the lease, with a residual amount at the end that can be paid (plus GST) in order to own the car outright, return or trade in the vehicle, or refinance the residual with another lease or loan.
Other similarities include:
The amount financed excludes GST (the lease company can claim the GST up to a maximum of 1/11th of the Luxury Limit of $57,009).
If there is a gap between the residual and what the car is actually worth at the end of the lease you will wear it - either as a gain or a loss.
As with novated leasing the monthly payments include GST. Eligible businesses can claim this.
Because leases defer the outright purchase amount to a later period in time, the monthly repayments are generally lower than what you would pay for a traditional car loan. This can make leasing a more affordable option for those struggling with repayments.
In addition, the exclusion of GST from the purchase price will reduce the amount being financed.
The catch with a car lease is that at the end of the period you will either hand back the car, or be required to pay (or refinance) the residual still owing.
Dependent on the specific situation and how taxation law applies, lease payments are usually tax deductible on vehicles used for business.
However, the best car finance options for small business can be highly dependent on specific financials, and an accountant is the best person to advise you on which option is the best for you.
If you'd like to read a about the differences between finance options, check out Car finance options: an overview.
Have you had a car lease before? Tell us your experience in the comments below.