Do you know what a novated lease is? If not, maybe it’s time to do some research.
A novated lease can be a great way to save money on your car expenses, but it isn’t for everyone.
This detailed guide will help you decide: Is a novated lease worth it?
What Is a Novated Lease?
A novated lease is a type of vehicle finance that is commonly used by employees in Australia. Under a novated lease, an employee leases a vehicle from a financier for a set period of time, usually between two and five years. The employee then makes regular payments to the financier, which are deducted from their salary before tax.
Novated leases are motor vehicle leases, which can be used to finance both new and used vehicles, and the terms of the lease can be structured to suit the needs of both the employee and the employer.
Novated leases, often called salary-sacrificing ones, are becoming increasingly popular as a way to finance company cars, as they offer a number of advantages over traditional finance options.
Is a Novated Lease Worth It?
You’re eligible for a novated lease no matter if you’re a full-time or part-time employee. But, is the novated lease right for you?
If you want to use the advantage of tax deduction, saving time, and having someone budget all of your expenses without a single worry, then a novated lease is the right thing. However, you must be honest with yourself and calculate if you can afford it as well as be aware of all the contractual conditions.
How much can you save?
You can save up a lot if you opt for a novated lease. Since the vehicle is paid partially from pre-taxed money, you may save up to 10% on Goods and Services Tax.
For more information on tax deductions and the difference between tax deductions and tax offset, read through this article.
However, a novated lease will attract Fringe Benefits Tax, which you can reduce or even eliminate by using the Employee Contribution Method. For example, you can choose to pay for some of the car’s running costs with your post-tax earnings and thus reduce or even eliminate the FBT.
Is it better than buying?
After your lease ends, you can buy off the car for only the residual amount owed. There are online calculators that can help you find out what that amount is, but in most cases, it’s less than the car dealership one.
What Is the Catch With Novated Lease?
How Does Novated Lease Work?
The novated lease is arranged between the employer, employee, and a financier, and effectively bundles the cost of the car and its running expenses into one convenient monthly payment that is deducted from the employee’s pre-tax salary.
Under a novated lease, the employer becomes responsible for making the monthly payments on behalf of the employee. This means that the car and its associated costs are paid for before taxes are calculated, which can result in significant savings for the employee.
In addition, novated leases often come with additional benefits such as free or reduced-cost servicing and maintenance, and the ability to choose from a range of different cars.
What Happens Once the Lease Ends?
Once the novated lease ends, you’re left with a residual value to pay. However, you’ll have multiple options to choose from:
- Lease renewal
If you like the terms and conditions of the novated lease, you’ll want to prolong it a bit longer. Maybe you fell in love with the car and it became an inseparable part of you. In this case, the residual value is re-leased and you can continue driving the same vehicle. This is a good option if the car is still reliable.
- Upgrade to a new vehicle
Maybe it’s time for something brand new and shiny. Once you get a quote for the model you fancy, you can trade in your current car and use the residual value to lease a new vehicle.
- Buy the vehicle
So, you want to keep the vehicle – it’s completely possible. All you have to do is pay the residual amount that you owe. Luckily for you, the financier sets the price of the car at the beginning of the lease, according to precise ATO guidelines. However, be aware you’re going to pay for it with your post-tax funds.
- Sell the car
If none of these options suits you, you can simply sell the car and use the money to pay out the lease.
Types of Novated Lease
There are several types of a novated lease packages, but two main ones:
Fully Maintained
If you get a fully maintained novated lease, the lease provider will take care of every expense related to the car. The whole process of finding the right car, getting the right deal, and dealing with maintenance, mechanic work, and expenses is on them.
They can even provide you with a fuel card so that you don’t have to look for a refund every time you put gas in the car. The fully maintained lease is right for anyone who doesn’t have the time to do those time-consuming car-related things.
Non-Maintained
If you get the non-maintained novated lease, you’re basically signing up to do all the paperwork and car-related obligations. You’ll find the car yourself, and do the negotiation with the provider.
Also, when it comes to a self-maintained lease, you’ll take care of the mechanic expenses, ask for fuel reimbursement, and budget all the car-related expenses yourself.
Note: You don’t have to drive a minimum number of kilometres each year. However, driving lower kilometres on your novated lease may have a positive impact when you come to trade your car in at the end of your lease. This guide explains see how many kilometers can you claim without receipts in Australia and the way to do it.
Novated Lease Pros and Cons
Novated Lease Benefits
- Novated lease tax benefits (payments of your net income, leading to tax deduction)Save on GSTSave on running costs (fuel, maintenance, insurance, registration, road assistance)Multiple options when the lease ends.
Novated Lease Traps
- You must pay the residual value once the agreement endsYou’re responsible for the lease even if you leave or lose your jobThe novated lease interest rate can be high in case your employer only work with one financierPenalties for terminating the lease earlier.
Bottom Line
So, is a novated lease worth it?
To learn more about how you get reimbursed for business-related car expenses and about how car allowance works in Australia read this article.
In most cases, the answer is yes. A novated lease can save you money on your car purchase, and it comes with benefits such as tax deductions. If you’re considering buying a new car, be sure to explore whether a novated lease could work for you.
1. Do you really save money with novated lease?
Novated leases will bring you certain benefits and may save you money. You’ll pay fewer taxes, and once the lease comes to an end, you can purchase the car for a price that is smaller than the average market one.
2. Is a novated lease better than buying?
It might not always be better, but it may come cheaper. When the novated lease ends, you can decide to buy off the car and you only need to pay the residual amount owed. When you buy a car on the market, the price might be bigger.
3. Why novated leases are bad?
Novated leases aren’t bad in general. Mostly, the terms and conditions vary depending on the financier. If the company works with only one financier, the novated lease interest rate will be extremely high. Another case is when you leave a job or get fired. The lease won’t stop with the termination of your employment, and you’ll need to pay off the amounts monthly.
