If you’re considering getting a new vehicle but don’t have enough money saved, you might think about taking out a loan or even a novated lease, sometimes known as “salary sacrificing” to buy the car. But what exactly is a novated lease and how does it work?
A novated lease involves your employer.
With a typical lease, you make an agreement with a leasing company. They buy the vehicle, and you use it while making regular lease payments. The leasing company own the car until the end of the lease, at which time you can make a residual payment and take over ownership of the vehicle. A novated lease includes your employer in the agreement. Your employer simply makes the lease payments on your behalf, then reduces your wages by the amount of the payments. This is known as a salary sacrifice (or salary packaging) and you end up paying less tax on your income. It is often easier to obtain finance through novated leasing because your employer guarantees the payments out of your salary.
New or used car? Who pays the running costs?
You can buy a new or used vehicle using a novated lease. It may also be possible to bundle the purchase price, finance costs, and running costs such as fuel, servicing and insurance into a single payment to be deducted from your gross salary. This is known as a fully maintained novated lease.
Comparison with a traditional car loan.
A traditional car loan works by borrowing money from a bank to buy the vehicle. You are the owner of the vehicle right away, but you also have a debt that is normally secured against the vehicle. You must make regular loan repayments plus interest. If you can’t make the repayments, you may have to sell the vehicle to pay off the debt. You are also responsible for the running costs, which you pay from your net salary. As you own the vehicle, you may be able to claim tax deductions if you use it to travel to work.
Things to consider before signing up for a novated lease.
You should check if the novated lease is tax effective for you. There may be other costs involved such as fringe benefits tax, which your employer may deduct from your wages. However, not all employers are obliged to pay this tax. You can seek advice on this from your employer’s payroll officer. You also need to find out the total package cost. Other costs, such as interest, administration charges and service fees might outweigh the savings you make. Make sure you understand what will happen if you have to leave your job. You may find that you become responsible for the lease payments, or you might need to enter into a new agreement with the leasing company. Be sure to check the value of the residual payment on your novated lease. Ultimately there are advantages to novated leases, just as with traditional car loans. So, be sure to get proper advice and make an informed decision.
