Firstly, what is a novated lease?
A novated lease is a three way agreement between an employee, employer and a novated leasing company. The employee’s role is simply to enjoy driving the car, all finance and running costs including fuel are covered in the lease – meaning the employee is given a fuel card and off they go, cashless motoring! The employer’s role is to set up an ongoing deduction out of the employees pay, for example, $125 a week is the ongoing out of pocket cost to the employee for the fully maintained vehicle. The novated leasing company’s role is to manage the vehicles finance and all running costs, they do this by paying for services and managing the budgeted running costs of the vehicle for the employee.
The difference between a novated lease and personal loan?
A personal loan is paid for using post-tax income, aka the money you receive on pay day that has been taxed before landing in your pocket. A novated lease allows an individual to use pre-tax income, aka gross income (money that has not been taxed) towards the finance and running costs of their car. By using tax free dollars towards a novated lease, ultimately this can save people thousands of dollars over the life of a lease. Furthermore, a novated lease gives people access to fleet discounts which can save additional dollars.
Let’s get onto the worst things
Fringe Benefits Tax. It’s a pretty ugly set of words isn’t it? When you engage in a novated lease you pay less tax, which means more money in your pocket! However, with more money in your pocket FBT is unavoidable and is part of your out of pocket cost each pay cycle. For example, if your vehicle repayment is $125 a week for all finance and running costs, a small amount of Fringe Benefits Tax is part of that $125 a week payment (it’s known as a post-tax deduction which satisfies the Australian Taxation Office from an FBT point of view). Again, it’s an ugly set of words but the good thing is there’s no big tax bills at the end of the year, it’s all included as part of your ongoing repayment.
Leasing sounds like ‘renting’. Novated Leasing can be two very misleading words, particularly in an industry where things are already confusing enough! In a novated lease the car is owned and registered under the name of the individual. It is not part of a fleet of cars, nor is it owned by a larger organisation. A person will have access to fleet discounts on the purchase price and during the lease on services and parts however the ownership of the car lies with you, the buyer, the individual!
Finance and Job security
Not everyone has a red hot credit rating. Be prepared to run through the finance application process in a novated lease. Yes, it’s great you can pay for finance and running costs using pre-tax dollars however it’s important to understand your financial situation. If you’re planning to get a 3 year lease, make sure you’re going to be working for those 3 years as the whole point of a lease is saving on income tax. If you finish your employment for any reason before the end of the lease you still have a responsibility to pay for the finance on the car. If you change jobs, you need to make sure your next employer allows you to continue your novated lease. The majority of employers Australia-wide allow this, as do State and Federal government, however, it’s always better to be safe than sorry.
Until next time, drive safely!