Is Novated Lease A Good Vehicle Financing Option?
One common option for financing a car is through a vehicle or personal loan. But a more viable option to buy a vehicle is through a novated lease.
What is a Novated Lease?
A novated lease is a vehicle finance benefit provided by an employer, wherein they lease the vehicle on your behalf. This option is often given as a salary package that will allow you to own a personal car by treating it like a company car.
In a novated lease, you enter a three-way agreement with your employer and the leasing party. What happens is you enter a financing agreement with the leasing party, but your employer is considered the one that leases the car. You repay the lease through monthly salary deductions.
Oftentimes, you’re not limited to the model, brand, or type of car, unless your employer says so. You can get either a used or a new vehicle, depending on how much you want to sacrifice from your salary.
In a typical vehicle loan, you give a down payment and pay the rest of the borrowed amount according to the agreed terms. This may last for 5 to 10 years, depending on the contract you signed with the creditor. Novated lease, on the other hand, works in reverse because you’ll have to make a residual or balloon payment at the end of the lease.
According to the ATO, the residual payment will be based on the years of the lease term. The longer the term lease, the lesser the minimum residual value you need to pay. For instance, at the end of a 5-year novated lease, the minimum balloon amount you must pay is around 28.13% of the vehicle’s value.
If you can’t pay the residual amount by the end of the lease term, you can choose to have it leased again under a new contract. You can also trade in the vehicle or sell it to collect the money needed for the balloon payment.
Types of Novated Lease
Here are the two common types of a novated lease that your employer may offer:
1) Fully maintained
Under a fully maintained novated lease, price negotiations, vehicle sourcing, and financial planning are all handled by the lease provider. GST exemption can also be enjoyed upon purchase of the vehicle. This is the best hassle-free option that will let you take advantage of all the benefits a novated lease has to offer.
As the name implies, you’ll handle the sourcing, negotiating, budgeting, and insuring of the vehicle. You’ll also handle all the paperwork associated with the lease, including deciding with your employer on salary deductions. You may have more freedom to choose the vehicle you want to purchase, but you’ll have to deal with the headache of managing every part of the lease agreement.
Why Get a Novated Lease?
One of the advantages of a novated lease is how your employer pays the lease using your before-tax income. This means you’re putting in more money to pay the lease while possibly enjoying lower taxes because of your reduced income.
Expenses on maintenance, registration, servicing, insurance, and fuel can be set aside on top of the lease repayment. You can have this arranged with your employer and have the excess budget returned to you at the end of the year.
A novated lease also helps you budget your salary each month because a portion of it is automatically allocated by your employer. Vehicle purchases through a novated lease are exempted from GST, enabling you to save a lot of money on upfront costs.
Fringe Benefit Tax (FBT) is a form of tax applied to benefits not in the form of cash. Novated lease is an example of this, so expect to pay FBT on your lease agreement on top of other expenses. However, novated leases are designed to be tax-effective so that the tax savings you get on the contract are larger than the FBT payable on your vehicle.
Not many companies provide options for a novated lease, so take advantage of it when your employer offers it. A fully maintained novated lease is also ideal so you won’t have to worry about the hassle of paperwork.
If you’re looking for a more practical way to purchase a vehicle, a novated lease is a good option. It simplifies repayment costs and maintenance expenses while taking advantage of tax benefits.