A novated lease is an arrangement that enables you to pay for your car using part of your pre-tax salary. It means you make tax savings on your purchase price and running costs such as fuel, insurance and servicing.
It’s a tax-effective way to get a new or used vehicle while enjoying benefits like fleet discounts and deals. The key is ensuring you get the right deal for your needs and understand all potential benefits.
Tax-effective
A novated lease courtesy of vehiclesolutions.com.au/fbt-made-simple-use-it-to-your-advantage-and-save is a tax-effective way to finance a car. It involves using your pre-tax salary as the financing element and is a great option for many Australian employees, especially those struggling to make ends meet.
A novated lease works: your employer takes the repayments from your pre-tax salary and passes them onto Remunerator, who then bundles the payments into one regular tax-effective repayment. Because your taxable income is reduced, you’ll pay less tax over the long term.
Remunerators work with you to set annual budgets for your car running costs, including petrol, tyres, insurance and servicing. It enables them to evenly spread the cost of these costs over the lifetime of your lease so that you can stay on top of your finances.
With wages across Australia remaining stagnant, novated leasing can be a much more tax-effective way of buying a new car than waiting for a pay rise. It also means you’ll have more disposable income to spend on the things that matter most to you – like your family, education, or travel.
As well as being tax-effective, a novated lease is an ideal way to finance your new vehicle. As a result, your monthly payments are usually lower than those of some other finance options, and the residual value (the amount you need to pay at the end of the lease) is also tax-free, which gives you more cash in your pocket at the end of the lease.
However, it’s worth bearing in mind that if you’re planning to sell the vehicle at the end of your lease, it might be difficult to predict what it will be worth on the used car market. As such, it’s important to choose a novated lease with an attractive residual value or a balloon payment to make the most of your future car sale.
A novated lease is an arrangement that allows you to acquire a new car or a used vehicle using your pre-tax salary. The arrangement is three-way and involves you, your employer, and a third-party finance provider called a novated lease company.
In a novated lease, your employer makes the lease repayments to the finance supplier on your behalf from your pre-tax salary. It is similar to how your salary is sacrificed into super funds, but with the added benefit of reducing your tax liability.
Salary sacrificing for cars is a popular way to obtain a vehicle without taking out a loan or paying the full cost out of your pocket. It offers several benefits over other options, including lower monthly payments and the ability to negotiate discounts on purchase prices.
The novated lease company should do the heavy lifting in setting up the arrangement and assisting you with any questions you might have. You can then restructure the arrangement by returning the car at the end of the lease or trading it in for a newer model.
A novated lease can be a great way to incentivise good and key employees or reward them for their hard work. However, some employers shy away from offering a novated lease because they are concerned that the administrative burden will be too much for them to handle or that it could cause problems if they make an employee redundant or fire them.
Fortunately, a novated lease is relatively easy to set up and is automated in most employers’ payroll systems. It also leaves you, the employee, with the responsibility to pay back the loan at the end of the lease, so there’s no risk for your employer that you’ll take their car with you if you leave.
In addition, a novated lease is one of the few ways to get around the GST paid when you buy a vehicle in Australia. As a result, you can save thousands of dollars on the car’s purchase price by arranging it through a novated lease scheme.
Tax-free
A novated lease is an employer-approved arrangement that allows employees to purchase a new or used car on the company balance sheet. It enables the employee to deduct the vehicle costs from their pre-tax salary under a ‘salary sacrifice’ arrangement, which reduces their taxable income and pays less tax.
The cost of the leased car is usually GST-free as the lease provider will cover the GST on the vehicle’s purchase price and then claim this back from the Australian Tax Office (ATO). If running costs are also included in the lease, these can be packaged to employees with their lease payment without GST, as the employer claims this as an input tax credit.
Alternatively, the novated lease can be structured to include all the motoring costs (registration, tyres and fuel) in one simple repayment. It can be a very tax-effective way to run your business, as it allows you to bundle all the running expenses into one simple monthly repayment.
As well as being tax-free, a novated lease can save you money in other ways. The tax savings can depend on a range of factors, including the level of income and the type of vehicle being leased.
Fringe benefits tax (FBT) is often a concern with a novated lease, but it can be minimised using the employee contribution method (ECM). Instead of paying FBT directly to the ATO, ECM means a portion of the total lease payments are made post-tax to offset any potential FBT liability and improve the tax effectiveness of the entire package.
Another advantage of a novated lease is the ability to deduct standard mileage from your vehicle’s annual operating cost. It can be very useful if you drive your leased car for work but do not commute to and from the workplace.
To make the most of this tax break, you need to track how much you spend on your leased vehicle each year and use a log book to prove it’s being used exclusively for work. Keeping this record will help you to claim a larger deduction of your standard mileage, which can result in significant income tax savings.
Flexible
A novated lease is one of the most flexible forms of car finance available. It allows employees to receive their preferred vehicle while saving money on their tax bills and not having to worry about depreciation. It also provides employers with a cost-effective alternative to operating a fleet of company cars, allowing them to increase their employee’s salaries without incurring high expenses or risk.
In a novated lease arrangement, an employer and an employee enter into a contract to finance the vehicle using a combination of pre-tax salary deductions and post-tax deductions for running costs like fuel, insurance, servicing, registration and tyres. In turn, the employer reduces the employee’s salary by the total cost to enable them to use the vehicle for business purposes.
The most common type of novated lease is the fully maintained lease, whereby the employer agrees to pay all or part of the rental payments and also includes other running costs in the lease (such as insurance, fuel, registration and tyres) for the life of the lease – this can be up to 5 years on some assets or older second-hand assets.