Are you looking to finance a car and want to find the most cost-effective and efficient way of doing so?
Novated leasing could be the answer.
Novated leasing has been around since the 1980s. More recently it has become the method of choice for organisations of all sizes to provide vehicles to their employees. Today, it is the most commonly used way to purchase and finance cars in Australia.
Novated leasing is not just for the very rich. In fact, 70% of novated lease users earn less than $100,000. If you’re in the market for a new or used car and your employer offers salary packaging, novated lease can save you money.
If you’re ready to drive away in your next dream car, here’s what you need to know.
What is a Novated Lease?
A novated lease is a tax effective structure used by employees of companies to finance motor vehicles. Choosing a new car to buy can be tough. Opting for a novated lease can reduce the friction and help save considerable time.
It is a three-way agreement between you, the employee, your employer and a finance company. In a novated lease, the employee owns the vehicle but the employer makes the lease payments to the finance company. Part of the employee’s salary is deducted as part of the novated lease contract.
Still, even with the Fringe Benefits Tax (FBT) liability, the employee will still save some money.
What Types of Novated Leases are There?
There are three main choices available:
- Novated finance lease: this option only finances the purchase price of the vehicle and excludes all running costs.
- Fully maintained novated lease: the lease calculates both the vehicle’s purchase price and its running costs.
- Fully maintained novated operating lease: the vehicle’s purchase price and running costs are accounted for in the lease, and the employee assumes the residual value risk.
Which Option Should You Choose?
Each of the three lease options has advantages and disadvantages that need to be weighed carefully.
The simplest way to measure your needs is to identify your long-term goals and current financial management skill set.
If you prefer the certainty of having full maintenance coverage, then you would benefit from the fully maintained novated operating lease. However, if you prefer to manage your own maintenance expenses and possibly want to buy the vehicle at the end of the lease, then a novated finance lease would be more suitable.
What are the Benefits of a Novated Lease?
Employees benefit by having a greater choice of vehicles, compared to the traditional company car option. Financing of the vehicle is paid by pre-tax dollars. You’ll also have an option to own the vehicle at the end of the lease. The vehicle can be leased for a hundred per cent private use with the employer’s consent. Multiple vehicles can be leased this way.
The benefits for employers are just as valuable. For employers, the benefits are that it is an easy and cost-effective way to add value to an employees’ remuneration packages. The time and costs associated with acquisition and disposal of the vehicle are not the employers’ responsibility.
Upon termination of employment, the responsibility for the vehicle is passed back to the employee.
What are the Potential Savings?
The savings you get with the purchase price through novated lease include:
- Fleet discount off the purchase price savings of up to $5,000-$6,000.
- A 20-30% fleet discount off the servicing costs and upfront discounts off the petrol price at the pump.
- No Goods and Services Tax (GST) on the purchase price, resulting in 10% savings.
- In addition, GST isn’t payable on the fuel, tyres, servicing or any other vehicle ownership costs.
- Most importantly, all vehicle ownership costs are pre-tax dollars saving thousands in tax payments.
Let’s Put Those Savings into Numbers
Irene earns $87,000 per annum. She buys a $45,000 new car and drives approximately 25.000 km per year for both business and private use.
Taking into account the tax and fleet savings, the difference to Irene with a novated lease compared to the conventional finance would be around $120 per week after tax.
That’s $6,240 extra in her back pocket every year. Over the three-year term of the lease, Irene saves nearly $20,000 on a new car. At the end of the term, she can re-lease the car or more likely, lease a new car. If Irene leaves her current employer, she can bring her novated lease contract to her new company.
How to Arrange a Novated Lease?
Financial experts from Max Funding say, “while a novated lease has more tax and monetary considerations, the process is not complicated so long as you choose the right financial package.”
The typical process you can expect is:
Step 1. Shop around for a vehicle and get quotes. Make sure the quotes list all options including projected operating costs, vehicle options and the vehicle cost.
Step 2. Estimate how many kilometres you’re going to travel over a year. You can do this by tracking your use over a normal week and by factoring in holidays and other times when you may be more likely to use your car.
Step 3. Decide if you want a fully maintained or non-maintained novated lease.
Step 4. Contact the financial consultant of your company and discuss your options. You can prepare an estimated salary package together, which you can sign when you are satisfied with it.
Step 5. Contact your selected provider regarding your novated lease options and apply.
Step 6. Provide details of your car dealer to your financial consultant to prepare and sign the Novated Lease Agreement.
Step 7. Compare your comprehensive car insurance options and apply to the provider you have chosen. Then get your insurance approved by your financial consultant.
Step 8. Your financial consultant will arrange payment to the dealer, and if you have a fully-maintained novated lease. Your consultant will also organise payments to your insurance provider.
Step 9. You can collect your vehicle and receive your fuel card from your financier. Start using your car.
A novated lease is the superior car leasing option that allows your employer to offer you substantial additional benefits as part of your salary package.