A novated lease lets you salary package a car while keeping your income tax low. It reduces your taxable income by deducting car payments directly from your pay each pay cycle.
Generally, novated leases bundle all your running costs in one monthly payment (fuel, servicing, insurance, rego and on-road assistance). This can make budgeting more accessible and give you more choices. For more information about the novated lease payout, click here.
Tax Benefits
With novated leasing, you can enjoy great fleet discounts, GST savings and reduced taxable income. The lease payments are deducted from pre-tax salary, and they also bundle all vehicle expenses in one payment – so you can avoid the pain of paying outright for your next car, or worse, a loan with interest that drains your take-home pay.
Novated lease payments are taxable as fringe benefits under FBT. Still, most companies will offer ECM (expense compensation management) to manage the FBT liability by making post-tax contributions for running costs. This reduces the lease payments and increases your disposable income while maintaining a comprehensive budget and ensuring you don’t exceed the ATO mileage limits.
The ATO sets the residual or balloon payment based on what they think a used vehicle will be worth at the end of your lease. However, this is only a guide, and the value of a used car can vary.
Flexible Repayments
Depending on your employer’s policy, novated lease payments can be goods and services tax (GST) free. The vehicle’s purchase price and running costs are all paid out of pre-tax salary. The finance provider may also claim an input tax credit for their part of the cost. For more information about the novated lease payout, click here.
A good novated lease specialist will be transparent about fees, which should all be clearly outlined in your quote. These typically include an establishment fee – an off amount to get the ball rolling, a markup on the financier’s interest rate and a small monthly administration fee to manage your account.
When choosing a new lease, it’s essential to consider your current circumstances and your plans. If you anticipate that your income will reduce when you have a novated lease, then you might want to look at other options for car finance. This could include buying the car outright or taking a loan.
Residual Value
The residual value of a novated lease is an essential part of any car financing agreement. Residual values are based on a series of guidelines set by the Australian Tax Office (ATO) and are estimates of a vehicle’s worth at the end of the lease term. Residual values determine how much you must pay from your after-tax salary to buy the car outright at the end of your lease.
The ATO sets the minimum residual values. However, independent novated lease providers can offer more favourable terms if required. The residual value is a significant factor that helps you keep your payments lower by depreciating the asset over the lease term. When the lease ends, you can trade in the vehicle and take away some tax-free profit or simply make up the shortfall with cash. Your new leasing provider will be able to advise you of your options at the end of the lease. For more information about the novated lease payout, click here.
Buying Outright
There’s no right or wrong answer to whether you are better off buying a car outright; it is up to the individual to weigh the pros and cons of both methods. What is true, though, is that a novated lease is a much more cost-effective way to purchase your next vehicle. The reason is that the lease payments are salary packaged, so they are paid out of your post-tax dollars (as opposed to a car loan, which comes from your pre-tax income).
At the end of your novated lease, you can trade in your vehicle, pay the residual amount, purchase it outright, or sell it and pocket any profit you’ve made. Your novated lease provider will forecast this residual value at the start of your lease so you can budget accordingly. You’ll also have the benefit of having all your running costs bundled into one smooth monthly payment, making it easier to manage your cash flow.