Your Definitive Guide to Novated LeasesIf you’re thinking of buying a car and you need finance, you might be wondering whether a novated lease is an option for you. It’s important you understand how Novated Leases work, and understand the full costs you are committing to, as they may not be the best finance structure depending on your circumstances. Read on to find out everything you need to know about novated leases, including answers to FAQs.
What is a novated lease in Australia?
Novated leases in Australia are most commonly used to finance a car under salary packaging arrangements. Salary sacrificing is another term for salary packaging. It involves sacrificing some of your pre-tax income to get other benefits. In the case of novated leasing, the main benefit is a car and associated running costs.
Is a novated lease the best option?
If you use your car for business purposes or for your job, generally Novated Leases are NOT the best finance structure as you can already claim expense deductions, reduce your taxable income, claim back GST (if you are GST registered) and therefore get many tax benefits without the cost, commitment, and complexity of a Novated Lease. A Chattel mortgage typically attracts much lower interest rates than a Novated Lease and is likely the optimal finance structure for you.
If your car is for personal use, Novated leases MAY be a good option, depending on your circumstances. Typically, the more expensive the car, the higher your income, and the more kilometres you do, the benefits of a novated lease start outweighing the costs. Novated Leases are very complex, your monthly costs and benefits are determined depending on the car, the forecasted kilometres, service costs, GST, Fringe Benefits Tax, your income tax brackets, etc. Leasing companies may take advantage of the complexity, focusing on your tax savings while not disclosing the costs to you of high interest rates, insurance premiums and monthly administration fees. The important thing to remember is that behind the tax savings, lies costs coming out of your pocket to pay interest, insurance, and monthly administration fees. These costs can often be significant and, depending on your situation, may outweigh the benefits in spite of the tax savings.
What does a novated lease mean?
‘Novated lease’ is a legal term, so you need to understand its legal meaning.
The word ’novate’ means to replace one legal agreement with another.
A lease is a contract. One party in a lease agreement transfers the title of property to another for a specific time in return for regular payments.
OK, that’s the legal explanation out of the way.
In layman’s terms, the novated lease meaning is a three-way arrangement between yourself, your employer and a finance company or bank. Your employer makes your novated car lease payments on your behalf. You get to drive the car for the term of the lease.
How does novated leasing work?
There are 3 basic steps in the process.
Step 1: Find out if your employer offers salary sacrificing for cars. Most employers offer salary sacrificing for superannuation, but only some offer it for cars and other benefits. That’s because it requires them to pay fringe benefits tax (FBT).
Step 2: If your employer does offer salary sacrificing for cars, you can start shopping for your new car. Once you decide on the one you want, you take out a novated lease with a bank or finance company and let your employer know the details.
Novated leases explained
The novated lease will be in your name. Your lease payments will be made by your employer from your pre-tax salary. These payments usually cover both car repayments and vehicle running costs (like petrol, servicing, registration, tyre replacement and insurance). These arrangements are commonly known as ‘fully maintained novated leases and the repayments are higher.
However, novated leases that only cover car repayments are also available. If you take out one of these leases, your payments only cover vehicle repayments, not running costs. Your lease payments will be lower, but you’ll have to cover all of your vehicle’s running costs yourself.
Novated lease terms usually range from one to five years. If you change jobs during the term of the lease, you will still be responsible for the repayments and hefty change fees often apply.
What happens at the end of the lease term depends on its terms and conditions. You may have any or all of the following options:
- buying the car for its current value (less any repayments you’ve made)
- taking out another novated lease for your car (or upgrade to another car)
- walking away from your lease and handing the car back.
Novated lease pros and cons
Like any car finance agreement, novated leases have their pros and cons.
What are the benefits of a novated lease?
- The main benefit of a novated lease is that it lowers the amount of tax you pay. That’s because the lease payment lowers the amount of after-tax income that you get. You therefore pay less tax.
- You don’t have to use the car for business purposes. You can use your car for private purposes, or a combination of both.
- You can include vehicle running costs in your repayments if you take out a fully maintained novated lease. One single repayment can cover both vehicle and running costs.
- You avoid paying GST on the vehicle as you are only leasing it during the lease term.
Novated lease disadvantages
- A novated lease results in less take-home pay for you.
- There can be hidden costs associated with a fully maintained novated lease, including highly inflated interest rates, petrol, running, administration, and insurance costs. The price of the car itself can also be inflated in a novated lease arrangement. That’s because people often focus on the tax savings, not on the price of the car or the interest rates. Unlike Consumer Loans, Novated Leasing companies are under no obligation to disclose your interest rate on the loan, or the amount of insurance commissions they are receiving. Make sure you always demand a response on the following:
‘Can you please reply and disclose the following in writing to me: the final delivery interest rate, the full cost of insurance products, and the total lifetime cost of the establishment fee and monthly administration fees.’
You will often find the provider hesitant, but if they do answer the costs can be mind blowing compared to a simple car loan paid after tax.
- Novated leases may contain driving and usage restrictions. For example, your repayments on a fully maintained novated lease may only include driving up to a pre-set kilometre limit.
- You can’t choose your provider as most employers have special relationships with the leasing companies (that may even involve them receiving rebates!) who work with your company’s payroll team. This means there is often no competitive tension when you’re getting quotes, as there is when getting other forms of car finance.
- You don’t own the car and you can’t make any modifications to it.
- There are likely to be additional costs if you change jobs or want to end your novated lease early. You may also be required to buy the vehicle outright as a condition of ending the lease early.
- You might not be able to transfer the lease to another employer if you leave your job. Not all employers offer salary sacrificing for cars. If you can’t transfer your novated lease when you leave a job, you’ll have to make your lease repayments out of your post-tax pay. You’ll therefore lose the major tax benefit of novated leasing.
- There may be a high balloon payment if you want to buy your car at the end of the novated lease. Sometimes the final payment owing on the lease can be a lot higher than the car is determined to be worth, and you have to pay the difference. This is one way that a finance provider can make their regular novated lease payments lower.
Is a novated lease worth it?
As you can see, there are many potential disadvantages to taking out a novated lease. Whether or not it’s a good option for you depends on your individual situation. The pros need to outweigh the significant costs especially fi you are in a low tax bracket, don’t do many kilometres, or aren’t getting an expensive car. You might be better off with a secured car loan or chattel mortgage instead.
It’s best to get professional advice about all your options before making a decision, and to consider your needs carefully. After all, buying a car is a big financial decision! Get it wrong and it could cost you a lot more money.
How we can help
If you’re looking to buy a new or used car and you need finance, talk to us at Auto Car Loans. We can help assess your situation and help you get a great deal from our panel of over 50 Lenders. We can arrange Novated Leases as well as Car Loans and Chattel Mortgages.
Don’t use dealer-arranged finance or try to arrange your car loan yourself. If you do, you’ll end up paying a lot more. We arrange car finance for a living, and we can save you money, time and hassle. We work for our clients, not for lenders.
Get in touch with one of our expert car finance brokers by calling 1300 301 051 during business hours. We’ll talk about your car loan needs and your best options.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.