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Is a novated lease worth it?
Like anything else to do with an individual’s financial situation, not to mention tax law, the answer will never be a simple one. And when it comes to a novated lease Australia has some very intricate legal wording.
For some people a novated lease will save them heaps, in other cases, you might be better sticking with a normal lease or even a personal loan. It really depends on how much you make, what your tax liability is like and how much you can afford to reduce your take-home pay each month.
But let’s start at the start: What is a novated lease in the first place and how does a novated lease work?
Fundamentally, it’s a system where you receive a new car that is paid for by your employer using money taken out of your pre-tax salary.
The lease will also include running costs including registration and insurance. Sounds complex? Well, it is, but it means you take home less money each month in your pay-packet, while the system should be revenue-neutral to your employer.
But even though your pay-packet might be a bit slimmer, by paying for the lease from your pre-tax earnings, you’ll effectively (in theory) be liable for less income tax.
And since you’re leasing the car instead of buying it, there’s no GST on the transaction (provided the car has been supplied by a licensed car dealer). Not at your end, anyway.
So how good would it be for you? What are the novated lease pros and cons?
First, there’s the potential tax break. Take some time to work out the annual cost of the car and its running expenses.
Let’s say that comes out to $8000 which is the amount that will be deducted from your pre-tax salary. Then, you subtract that figure from your wage - let’s say $7000 – leaving you with $62,000 on which to pay your income tax.
And bingo, you’ve just reduced your tax liability. So, one of the answers to the question; is salary sacrificing a car worth it, will come down to how much tax you actually pay.
For low-income earners, the equation doesn’t always add up and, if you were never liable for that tax, you can’t claim it back. That’s when you have to examine the novated lease vs buying outright sums.
The other advantage is that you’ll be making relatively small monthly repayments, rather than one single, large payment which is another of the benefits of a novated lease arrangement.
For many businesses with standing monthly costs, this smoothing of cash-flow is an important consideration. The novated lease also involves a smaller initial outlay than some other forms of financing, freeing up cash reserves even further.
So what happens at end of a novated lease? You can drive the car as much or as little as you need to and, when you’re done with it, you simply return it to the finance company, upgrade the vehicle to a new one by taking out a new novated lease or, paying out the balloon payment and owning the car outright.
This balloon payment will be based on what interest rate you’ve paid and the residual value of the car, which is calculated at the start of the lease period.
But there are plenty of other things to consider. The first of these would be to speak with your employer to check that your employment terms qualify you for a novated – or any other kind of - lease.
This is particularly important as a novated lease can be termed a benefit to you, and therefore your employer may be liable for fringe benefits tax.
Also, if you change jobs, you need to know whether the lease can move with you. If so, you need to have your new employer accept the terms and responsibilities.
Any form of car financing has its pros and cons, and even if it’s not a novated lease you’re looking at, you have to ask yourself is leasing a car worth it?
That’s where your accountant and the various lease companies step in, because it will be totally dependent on your personal circumstances.
Make sure you get it explained to you in full, too, because compared with a novated lease what is allowed as deductible in other types of leases varies a lot, including on how you use the vehicle.
Many finance and leasing companies have an online site that spells out in detail how to salary sacrifice a car as well as novated lease disadvantages and advantages and should also reference current applicable interest rates, establishment cost and other add-ons as well as offering an online calculator to get you started.
In the end, of course, even the best novated lease companies will answer the question 'are novated leases worth it' with a resounding yes, purely because that’s their business. Which suggests independent advice is probably the first step you should take, and that’s where your chosen accountant comes in.