What is a Novated Lease?

A Novated Lease is an agreement between you, your employer and the lease finance company when purchasing a vehicle.

The Novation Agreement transfers the obligations you have under your lease to your employer. Your employer will then take on the responsibility to pay or reimburse the lease payments, registration, insurance, maintenance and fuel for the vehicle. Your employer will deduct money, some in pre-tax dollars, from your salary to pay these costs. This means tax savings for you.

If you leave your employer though, the responsibility of these costs revert back to you. In certain circumstances your lease may be transferred to your new employer if novated leasing is offered by that new employer.

Why do a Novated Lease?

Well the way I look at it is if you are in the market to buy a car you should ask the question “What is the most cost effective way to buy it,” and 9 times out of 10 a Novated Lease is.

It’s that simple.

Yes, doing a Novated Lease does lower your taxable income which in turn may lead to potential Centrelink advantages depending on your circumstances however the overriding factor is that the novated lease is generally the cheapest way to have use of a vehicle.

With a Novated Lease you will have the use of fuel cards and your maintenance, rego and insurance will be catered for.

Everyone’s situation is different and not everyone may suited to a novated lease depending on their circumstance. Call for an obligation free discussion so you can make an informed decision whether a Novated Lease is right for you.

How does it all work?

This is the technical bit which I’ll endeavour to simplify.

Basically by signing a novation agreement the employer agrees to pay for your car whilst working for them. When an employer gives you a benefit in lieu of income (which is what happens), income tax is replaced by fringe benefits tax. FBT rate is at 47% so generally there is no benefit to you however in the case of a novated lease it is concessionly taxed at 20% of the base value of the car (the base value or capital cost is the purchase price less stamp duty and rego). There are a couple of different methods of doing this but we’ll stick to what’s call the “Employee Contribution Method” or ECM. This is the method used in the majority of novated leases for Qld Government employees.

With the lease you will have finance costs and running costs. Below is a simplified example of how it works.

Calculations

$6600 ($550 lease payments x 12)

$5010 (running costs)

$11610 (GST included $1055pa – the GST if paid is refunded to your packaging account and acts as a buffer for any extra running costs)

-$5710 (ECM – 20% of $28550)

+$519 (GST on the ECM)

$6419 pre-tax component

These figures are annualised so to take them back to a fortnightly figure they are divided by 26.

$6419/26 =$246.88 pre-tax (the administrators fee – generally around $10 is added to this)

$5710/26 =$219.62 post-tax

You get a tax break on the pre-tax component thus giving you an advantage.

In this case the car would cost or the decrease in your take home pay would be

$381 which includes $233 in running costs.

Over the term of the lease to own (paying out the residual at the end) and run the car for the 4 years would cost –

$381 x 26 x 4 = $39624. + $10500 (the residual)

= $50124 total out of pocket cost.

If you had a lump of cash it would cost over the same term

$30000 + ($233 x 26 x 4)

= $54232 total out of pocket.

So you can see the novated lease is far cheaper than cash. In reality most people don’t have a lazy $30000 floating so will redraw from a home loan or worse which in effect makes the cost of not doing a novated lease far more expensive.