Stamp duty for cars explained
When you go to buy a new or used car, you will have to pay stamp duty. But what...
Sure, it sounds like one of those things your accountant mentions that suddenly make your eyes heavy and provokes the choking back of a yawn, but novated leasing is a term that's genuinely worth getting your head, and your hip-pocket, around.
A traditional new car purchase involves two parties: the seller and the buyer. But introduce your employer into that relationship and you've got yourself a ménage-a-car that could save you a fortune. Welcome to the wonderful world of novated leasing.
What is a novated lease?
While the idea of paying for something you don't actually own might sound like the kind of sales pitch you get from those internet-loving Nigerian royals, leasing – rather than buying – your next new car has the potential to save you serious money.
A regular loan is paid using your post-tax salary, meaning whatever is left in your bank account after you've paid tax, where as a novated car lease is paid before tax.
In Australia, it's referred to as a novated lease – an unnecessarily confusing legal term that essentially means introducing a new party (your employer) to your purchase agreement. So, what is a novated lease? It's a way to pay for your vehicle via salary packaging, meaning your employer pays your car payments for you, out of your pre-tax earnings. Generous old soul he or she is.
How does a novated lease work?
A typical novated lease agreement can stretch two, three or five years, after which you have the option of either trading in your car for a newer model on a new lease (another bonus of the system is not having to keep an old dunger for too long), or paying a pre-determined buy-out fee (called a"balloon" payment, which isn't as buoyantly fun as it sounds) and keeping the car.
If you're weighing up a novated lease versus a car loan, consider this: a regular loan is paid using your post-tax salary, meaning whatever is left in your bank account after you've paid tax, where as a novated car lease is paid before tax, so not only do your dollars go further, but you're lowering your taxable income at the same time.
Crucially, you're not renting your vehicle. Car rentals are what happens at airports, and involve paying a sizeable amount of money for the privilege of borrowing a battered Hyundai that's seen 500,000 brutal kilometres and is in desperate need of disinfectant. That is not how a novated lease works, as KPMG tax partner, David Sofra explains.
"A novated lease involves yourself, your fleet provider and your employer. It allows an employer or a business to lease a vehicle on behalf of an employee, with the payments the responsibility of the employee, rather than the business," he says.
"The difference between a novated lease and normal finance is that your vehicle payments include all running expenses, and are taken from your pre-tax salary, so regardless of what scale of tax you pay, there's always going to be a benefit."
But it's not all free, sexy new wheels for you. Governments famously don't just hand out money, and so your novated lease is subject to what's known as fringe benefit tax, or FBT, which is calculated at 20 per cent of the vehicle's cost, multiplied by the maximum tax rate.
So, if you were to lease a $35,000 car, your annual FBT would be $3150. However, even with FBT, novated lease salary packaging can still save you money.
Let's look at the numbers. We asked KPMG to calculate some examples, based on a $35,000 new car with annual running costs of $13,200 (including registration, insurance, repayments, servicing costs and fuel).
If you're earning $65,000, your net salary (after tax and the above car costs) will be $37,828, or $728 per week. However, using even the most simple novated lease, your take-home pay increases to $38,347, or $737 per week.
Most companies offer an online novated lease calculator that allows you to punch in your salary, your desired car and your lease term, before calculating exactly what your lease payment will be, and how much money you'd save.
And the savings are greater the higher your salary. On a wage of $85,000, for example, your take-home pay increases from $50,703 to $51,446, while on a salary of $190,000, it increases from $113,753 to $116,143.
Yes, that's a lot of numbers to take in, but here's the most important bit: in each case it's the same car, and the same salary, except that with a novated lease there is more cash in your pocket every week. And by using the dark magic of tax wizardry, it is possible – and legal – to significantly increase the amount you save. But that's advice you'd best ask your accountant about, before you nod off in his office.
"The number-one benefit is that it's so tax effective – you're paying for the running costs of the car using pre-tax dollars," says Mr Sofra.
"The second benefit is that you have increased buying power by going through a fleet company. If you secure a novated lease through a fleet provider you can get a much bigger discount by utilising that buying power to secure that vehicle, rather than just walking into a dealership.
"And the third major benefit is the flexibility to change your car when your lease expires. Depending on how your lease is structured; you can either pay out the residual, or hand the vehicle over and get a new car after two, three or five years.
"Plus a fleet company will manage all your servicing requirements for you, with the upkeep usually included in your lease payment."
A novated leasing company, of which there are many, will usually charge an annual administration fee and, after you and your employer sign some paperwork, will do most of the work. Your salary is then altered through your company's pay office, just as if you were making additional contributions to your superannuation fund.
While some leasing firms take commissions from manufacturers for pushing people into particular cars, there is no pressure to join the army of Toyota Camry drivers. Most companies offer an online novated lease calculator that allows you to punch in your salary, your desired car and your lease term, before calculating exactly what your lease payment will be, and how much money you'd save.
There are some potential pitfalls to be aware of, as Mr Sofra explains, not least of which being that governments have been slowly winding back the tax benefits of novated leasing.
There's also the fact that for your employer to make payments from your pre-tax salary, you'll need an employer. And a salary. So job security is key.
"The biggest drawback is the fringe benefit tax. Conditions were so much more generous five years ago, but slowly the government has been clawing back these tax concessions. So five years ago, an employee could have been paying seven per cent FBT, whereas now they're paying 20 per cent," says Mr Sofra.
Losing your job would put a definite dampener on your ability to make repayments, so job security is something of a given for car ownership.
"And with the end nearing for local vehicle manufacturing, there is a risk of further reductions once the government has no local industry to protect. So there is a chance those concessions will go completely, and if they do, novated leasing will be dead.
"The other risk is job security. While your current employer might be willing to enter into a novated lease on your behalf, there is no guarantee your next employer will be quite so generous. If you've just signed a five-year lease and you were to leave your employment, what do you do?
"First, you hope your new employer will be happy to take on the novated lease. If they're not, you're in trouble. Your ability to salary package is gone, and you'll be left paying out of post-tax dollars."
Still, even with a car loan, losing your job would put a definite dampener on your ability to make repayments, so job security is something of a given for car ownership.
In the end, while it might seem, and sounds, mildly confusing, novated leasing is definitely something worth asking your employer about.