Do you ever find yourself walking down to the carpark in your office and seeing one of your colleagues driving a brand-new luxury car and wondering to yourself, “How can they afford that car?”
You might think that their spouse or partner has a great job, they’ve come into a bit of money through inheritance or an investment or maybe they just scrimp and save on everything else to afford the car of their dreams.
The other alternative is that maybe this person has found a simple way to affordably acquire and run their car in tax effective way that you’re not necessarily aware of.
That might just be the case and they could be doing it through novated leasing.
WHAT IS A NOVATED LEASE?
A novated lease is essentially a way of acquiring a vehicle where repayments and some operating costs are bundled and then taken out of your salary by your employer and paid to the finance company.
In essence, it is a three-party agreement between you, your employer and the financing company providing the novated lease.
HOW DOES IT WORK?
When you decide on the make and model of the car you want to buy, you can generally source a quote directly from the dealer and pass that through to the novated leasing provider your company uses or you can often request a quote from the novated leasing company directly who will often have fleet purchasing deals in place with most car companies.
Your quote will cover the cost of the car and if you choose to have a fully maintained novated lease, then your anticipated petrol, government registration, comprehensive insurance and basic running costs will be bundled in.
Novated leases also require that the car have a residual value at the end of the lease to comply with tax laws, so this amount varies depending on the length of the lease – it can range from 65.63% on a one year lease through to 28.13% on a 5 year lease. At the end of the lease term you can determine whether or not you want to refinance that residual value, pay it off in full to own the car outright or hand the car back to the novated leasing company.
It’s important to remember that you do not own the car, you’re leasing it.
WHAT ARE THE BENEFITS OF A NOVATED LEASE?
The obvious benefits of a novated lease are that depending on how much money you earn and the value of the car, it can have a tangible tax benefit over traditional car loans. As the payment for the car and the operating costs come out of your pre-tax income, this lowers your taxable income and reduces the overall tax that you have to pay.
The other related benefit is that you get to bundle up your running costs into the overall leasing package further increasing the tax benefit. Your fully maintained lease can include petrol costs, comprehensive insurance, government registration fees plus things like tyre replacements. When you factor in these elements becoming more tax effective through your novated lease, it starts to add up to real savings over time.
INTEREST RATES AND FEES
Interest rates for novated leases are generally better than what you can get from a bank on a personal loan to buy a car. Novated leases are often competitive with dealer financing rates that you see advertised plus have the tax advantages that you can’t get with dealer finance.
Most novated leasing companies will also charge you some kind of annual administration fee as part of the package. This fee is included to cover the cost of managing all the operating elements and for generally maintaining the lease itself.
You also need to consider that there can be Fringe Benefits Tax (FBT) implications on a novated lease. In quotes that you receive from a novated leasing provider, the FBT will be included in the quote, but depending on your own personal tax situation and how you intend to use the car (for a mix of business and personal use as an example) this may change the FBT implications. If you’re uncertain about your FBT exposure or you’re aware of other claims that you make, it is worth speaking to your tax accountant for advice.
The most important criteria is whether or not your employer currently has a novated leasing provider that they currently work with and if not, are they willing to enter into novation agreements. For some smaller companies, the effort of managing a novated leasing program just isn’t something they are willing to undertake, although in recent times, many novated leasing providers manage their programs as fully outsourced arrangements. That said, your company still has to be willing to participate because this is a three-way agreement.
Another criteria that can impact your eligibility and qualification for a novated lease is the length and type of your employment. Some employers only make novated leasing options available to full-time employees and not contractors or part-time staff. You’ll need to check with your employer to see if they have any specific employment status or length of service requirements.
And finally, like any personal finance option, you need to be able to qualify against your novated lease provider’s lending criteria. This usually means that you must make enough money to repay the amount you’re financing and you should have a good credit history.
FREQUENTLY ASKED QUESTIONS
Can I buy any make or model of car I want?
The answer is a qualified, yes. For the most part, if you can get a quote and the car is eligible to be registered in your state, then you should be able to acquire it through a novated lease.
There may be certain features or enhancement packs that are not covered.
Most novated leasing companies have fleet deals with specific car manufacturers, so it might be worth it financially to speak to the novated leasing company about which companies they have deals with and whether there is a similar make and model to what you’re looking for.
Can I buy a used car?
Yes, provided that the car is full working condition and is less than seven years old, weighs less than 1 tonne and carries less than 11 people.
There is a common misconception that novated leases only apply to new cars. While the majority of vehicles put through novated leasing programs are predominantly new cars, it is possible to also lease a used car providing it meets the above requirements.
How do I pay for my fuel or replacement tyres if I have a fully maintained lease?
Most novated leasing companies provide customers with some type of fuel card that they can use at petrol stations where they buy their fuel. Some companies will have a pre-loaded debit card that can be used and others will have a system like Motorpass which is accepted by over 98% of petrol stations in Australia.
With tyres, your novated leasing company will often have relationships with a number of leading tyre replacement and service centres. When your car’s tyres need to be replaced, you can contact the approved service centres, notify them about your leasing company and they can get pre-approval for replacing your tyres and any service work that may be required.
In any case, if you are out of pocket, you can usually file a claim with your novated leasing company and they will organise to repay you in whole or in part. It is usually best to work with their fuel card and pre-approved suppliers whenever possible to avoid any issues with repayments of out of pocket charges.
Can I get roadside assistance?
Speak to you novated leasing company about roadside assistance when you are getting a quote for your car. As they handle your comprehensive insurance, many of those premiums come with roadside assistance so it’s included, however, if it isn’t then your novated leasing company will have an alternative option for you that can be bundled into you quote to give you the level of service you require.
What if my employer doesn’t have a Novated Leasing provider?
This can be a little difficult for some employees to navigate. There is no requirement for your employer to have a specifically established working arrangement with a novated leasing company for your to be able to get a novated lease.
However, your employer must be willing to enter into a novation agreement with a finance company providing the novated lease. This will add some additional requirements to your employer’s payroll department, but virtually every modern payroll system can handle this now.
The best thing you can do if you’re not sure is to speak to your human resources department or failing that someone in your payroll team to ask about novated leasing and salary packaging options.
CONTACT THE NOVATED LEASE EXPERTS
With almost 2 decades experience helping people to navigate novated leases, Mortgage World Australia are the only experts you should contact. We have specialist know-how and offer our clients truly independent and tailored advice to ensure you get the right lease for your requirements.
Let us take the hassle out of your next novated lease. Get in contact today and talk to one of our friendly staff.