A novated lease can be a smart way to finance a car, especially if you’re employed and your company offers novated leasing as a benefit. However, like any financial decision, it’s important to weigh the pros and cons before diving in. In this comprehensive guide, we’ll explore the advantages and disadvantages of novated leases and delve into the details to help you determine if it’s the right choice for you.
Quick Data Point Table:
| Advantages | Disadvantages |
|---|---|
| Tax savings | Residual value |
| Extra tax saving on EVs and PHEVs | If you leave employment, you need to take your car with you |
| Car running costs inclusion | No GST savings on private purchase |
| Personal use of the car | Exclusive lease provider |
| Vehicle type flexibility | Salary requirement |
| ‘Fleet discount’ possibility | Unnecessary costs |
| Flexibility at lease end | Complexity |
Tax Savings on Your Car:
Novated leasing offers tax advantages such as savings on GST and income tax by making payments directly from your pre-tax salary. Additionally, car running costs included in the lease are also GST-free, resulting in potential savings of thousands of dollars annually.
Extra Tax Saving on EVs and PHEVs:
Legislation introduced in 2022 exempts electric vehicles and plug-in hybrids from fringe benefits tax (FBT) when novated. This translates to substantial tax benefits, making it more cost-effective than buying and running the same car outright with cash.
Car Running Costs Inclusion:
A fully-maintained novated lease covers vehicle finance and running costs, including fuel/charging, insurance, registration, and servicing. By rolling these expenses into your lease payments and enjoying GST savings, you could save significantly each year.
Personal Use of the Car:
Contrary to popular belief, novated leases can be utilized for 100% personal use, without restrictions on usage, despite being linked to employment.
Vehicle Type Flexibility:
Novated leases aren’t limited to new cars; they can also encompass used vehicles and allow for the addition of accessories, all with the benefit of GST discounts.
‘Fleet Discount’ Possibility:
Through their bulk-buying power, novated lease companies can secure better prices from dealers, potentially delivering cost savings to individuals.
Flexibility at Lease End:
Unlike traditional car financing, novated leases offer various options at the end of the term, such as purchasing the vehicle, renewing the lease, or selling the car and retaining any profit tax-free.
Residual Value:
Novated leases require a final payment known as a residual, representing the car’s value at the lease end, which may be a deciding factor for some individuals.
If You Leave Employment, You Need to Take Your Car with You:
Lease agreements are tied to the employee, not the employer, so leaving your job with a novated lease necessitates continued payments until re-employed with an employer offering novated leasing.
No GST Savings on Private Purchase:
Novated leasing facilitates GST exemptions on car purchases, but this benefit is exclusive to acquisitions through registered dealers, with private purchases ineligible for these savings.
Exclusive Lease Provider:
Some employers have exclusive ties to particular novated lease providers, limiting the ability to shop around for the best deals, potentially resulting in higher fees and reduced benefits.
Salary Requirement:
To qualify for a novated lease, individuals must be paid a salary, potentially excluding business owners without salaries, who may need to explore alternative financing options.
Unnecessary Costs:
Novated lease companies may upsell low-value extras and include additional costs by default, necessitating vigilant scrutiny and opt-outs to avoid unwarranted expenses.
Complexity:
While offering significant savings, novated leases are more intricate than traditional car financing, requiring transparency, expertise, and a thorough understanding of the process.
FAQs:
Q: Can a novated lease be obtained for a second-hand car?
A: Yes, novated leases accommodate both new and used vehicles, offering flexibility in model choice.
Q: What happens if I want to upgrade my car during the lease term?
A: Novated leases provide the option to renew the lease for a longer term, allowing individuals to upgrade to a new vehicle if needed.
Q: Are there any tax benefits for novating an electric vehicle?
A: Yes, novating an electric vehicle or plug-in hybrid can result in additional tax benefits due to the FBT exemption introduced in 2022.
Q: Can novated leases cover the cost of car accessories?
A: Accessories can be added to the car and included in the novated lease, with the advantage of GST discounts on these extras.
Q: How is the residual value calculated at the beginning of a novated lease?
A: Residual value is determined upfront and represents the car’s anticipated value at the end of the lease, impacting the final payment at the lease term’s conclusion.
Conclusion:
Ultimately, whether a novated lease is worth it depends on individual circumstances and the specific vehicle being considered. The tax savings are the primary lure, especially for EV and PHEV purchases, but careful consideration of income, vehicle choice, mileage, purchase price, lease costs, and complexity is essential. By analyzing these factors and comparing lease options, individuals can determine if a novated lease aligns with their financial goals and vehicle needs.
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