To buy outright or to finance — that is the question. Car buying options today are as varied as car models in a showroom. With so many options available, first-time car buyers may find it difficult to choose the right option for their needs and budget.
For first-time car buyers, particularly those in Australia, novated leasing is a great option when it comes to owning the car of their dreams. Below, Australia’s leading car finance company guides you through the ins and outs of novated leasing.
Novated leasing in a nutshell
Novated leasing is a popular way for Australian car buyers to get a new car and increase your net disposable income at the same time.
A novated lease is an agreement between you, your employer, and a car finance company. Unlike traditional company fleets, there are few restrictions imposed on make or model so you can choose the vehicle make and model that suits your lifestyle.
Novated leasing isn’t for everyone, though.
It is most beneficial to individuals who work full-time or who have a permanent part-time position. As novated leasing is a three-way agreement, it only works if your employer supports salary packaging.
Novated lease costs
The costs of the novated lease are almost all done through your pre-tax income. These agreed repayment obligations are deducted from your earnings as arranged with your employer.
Running costs that must be considered when entering a fully maintained novation agreement include the following:
- Fuel
- Insurance
- Tyres
- Registration
- Maintenance
- Roadside assistance
All of these running costs are mostly funded through your pre-tax income and determined when you first establish the lease agreement. Using an online novated lease calculator will help you determine weekly repayments and annual savings.
Payments are also lowered as the finance company you’ve entered into an agreement with will remove the GST on the vehicle’s purchase price. This, coupled with income tax exemption, means reduced repayments.
Novated lease options
There are two novated lease options available to car buyers: fully maintained and non-maintained novated lease.
A fully maintained novated lease is the more popular option of the two as it is all-inclusive. It covers the full cost of the vehicle, including operating costs. A non-maintained novated lease only covers the purchase price. Sometimes, it includes one vehicle expense, such as insurance.
For first-time car buyers, a fully maintained novated lease is a great option as all vehicle-related costs, including financing, can be managed in one single payment plan. A non-maintained novated lease requires the buyer to budget for associated expenses out of pocket.
Both novated leasing options have flexible lease terms to choose from. Most lease terms are fixed between 12 to 60 months. At the end of the lease term, the buyer has the option of extending the lease or buying the car outright.
If you decide to buy the vehicle after the lease term, any equity built up will go towards the sale of the vehicle. The sale of the vehicle post-lease is also tax-free.
Advantages of novated leasing
For employers, novated leasing is a great way to attract top talent to the company.
Adding a vehicle agreement to the salary package can be a deciding factor for prospective employees. Employers are also not responsible for the vehicle, meaning they are not subject to residual-value risk if the employee decides to leave the company.
Alongside their employer, employees gain significant benefits when selecting novated leasing.
As the costs of the vehicle are deducted from pre-tax income, employees benefit from a lower rate of tax. The lease and vehicle in question are also portable. With the vehicle and lease under the employee’s name, there are also no restrictions as to when and who can use the vehicle.
The employee maintains 100% responsibility for the vehicle and lease. This means that if the employee decides to join another company, both join the employee at their new company under a new Novation Agreement with the new employer.
Disadvantages of novated leasing
While there are many benefits to novated leasing, it does come with certain caveats.
Individuals are only eligible for a novated lease as long as they’re employed. Losing or quitting your job means you’re still fully liable for all financial obligations. This can result in paying out of pocket.
Employees who fall in a lower tax bracket may not gain the same tax benefits as those in a higher tax bracket. Confirm what tax concessions are afforded to your tax bracket before committing to a lease agreement.
Should you get a novated lease?
If you’re looking for a cost-effective way to buy the car of your dreams, then consider novated leasing.
Novated leasing is a great option for any first-time car buyer looking to own a vehicle. Not only does it provide access to almost any vehicle make or model, but the tax savings and easy, affordable payments also mean that you can save make significant savings..
About the Author
Rob Chaloner is the Founder and Managing Director of Stratton, and is passionate about smarter ways to buy and finance cars. With Stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.
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