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Of all the car financing options available to Australians, novated leasing seems to be the least popular.
That comes as a surprise considering that this type of car financing is arguably the most affordable option available to Aussies. Although novated car leasing is beginning to gain traction among borrowers nowadays, many people are still completely in the dark about it.
Last year, the Financial Review reported that only 40% of businesses offer novated leasing to their employees. But, what is novated leasing and why is your employer involved?
How does a novated lease work?
A novated lease is a car financing method that involves three parties: the employee, the employer, and the car finance company (leasing company). Instead of you (the employee) going into an agreement with the finance company, your employer will do it for you.
The employer will pay for the lease on behalf of the employee, including all the running expenses like maintenance, insurance, and monthly fuel (usually with a fuel card). After that, the employer will make monthly deductions from the employee’s pre-tax salary (salary sacrifice) to cover the leasing expenses. Technically, the employer purchases the vehicle and the employee leases it.
Typical terms for novated lease run between three to five years. After the contract term, the employee can make a balloon payment’ to finally own the car. The employee can also trade the vehicle instead and get a new model under another novated lease agreement. If there’s a change of employment within the term, the contract may be passed to the next employer so that employee can continue leasing the vehicle through salary sacrifice.
Who is it for?
Novated leasing is most suited to employees who prefer to have all their car-related expenses under a single salary deduction. A salary sacrifice novated lease is ideal for those who are seeking the most affordable and convenient way of owning a vehicle. The novated car lease is also suited for companies that need to improve the attractiveness of their employee salary packages.
Advantages of a novated car lease
Novated leasing has advantages for both the employer and employee. For the employer:
- It can be a very helpful asset in employee recruitment and retention. Novated lease can be used as a benefit in the employee salary package to attract talented professionals to work for the company long-term.
- Any expenses incurred (during the lease term) that are related to the maintenance of the lease are tax deductible.
- GST credits are claimable for any GST included in the lease.
- Lease obligations will be transferred to the employee upon the termination of employment.
- There will be no residual risk as the burden will fall on the employee.
On the other hand, an employee will enjoy the following benefits out of a novated lease:
- During the lease period, he/she has the exclusive use of the vehicle for personal purposes.
- Since the deductions will be made on the pre-tax salary, a lot of money can be saved in the long run by reducing your taxable income. There’s even a chance of going down to a lower income tax bracket.
- There will be no GST upon purchase because it will be shouldered by the employer.
- A higher chance to get the vehicle for a lower purchase price because of fleet discounts (for the finance company) and corporate discounts (for the employer).
- Any profit gained from selling or trading the vehicle after the lease term is tax-free.
- Used cars up to 15 years old are eligible for novated leasing.
Are there any disadvantages?
Yes there are, and these disadvantages are mostly directed to the employees:
- Novated leasing is not applicable to vehicles with more than eight seats or have a carrying capacity of more than one tonne. This will narrow down the vehicle choices of employees to medium SUVs or smaller.
- Providing employees with a novated leasing benefit will result to Fringe Benefits Tax (FBT) liability on the employers. Employers calculate their FBT liabilities using the Statutory Formula Method or the Operating Cost Method. However, the employees often bear this tax in the end, as emplaussoyers can off-set it calculating for the salary package. They can help reduce the financial burden of FBT by adding the running cost of the vehicle to the lease.
- For many people, the balloon payment required at the end of the lease agreement can be a heavy burden. If they are unable to find a buyer, the employees will have to pay the entire residual value of the vehicle to retain the ownership. Otherwise, the car will be repossessed by the finance company and all the previous payments will be wasted.
- Another disadvantage of novated leasing is the upfront payment of fees and interests if the employee decides to suddenly end the lease agreement. This payout can be higher than what you think. So, getting a novated lease without prior setting of your long-term plans is a big risk. If you can see yourself creating a family or buying a new car in 4 or 5 years, then a novated lease term of three years is the best for you.
- As with any type of loan, there is a huge risk of losing the car upon unforeseen job termination. The responsibility of lease payments will be transferred from the employer to the employee, and any unpaid lease will lead repossession of the vehicle.
- Lastly, if not included in the salary package, you might need to do some extra work to convince your employer to approve the novated car leasing. Although it can be beneficial for both parties, some small to medium business may not have this type of employee benefit yet. In which case, you will have to find other car financing methods.
Is it worth it?
As you have read, there are many advantages and disadvantages of getting a novated lease, particularly for the employees. However, the benefits clearly outweigh the downsides of it. If you are an employer, you’ve got nothing to lose. Instead, you’ll be able to hire or retain your best employees and make them happy.
On the other hand, the financial benefits and convenience of novated car leasing make it a worthy financing choice compared to a secured personal loan for a car if you’re an employee. You can and enjoy the benefits of your new car, while the finance company and your employer take care of all payment processing.
Just keep in mind that staying employed is the key to make a novated lease work for you. To be ready in case of involuntary unemployment, make sure to save as much as you can. It will ensure that you have money to pay for the lease and residual value settlement on your own.
Aussie Car Loans provides Novated Lease Services and other business finance options for new or used vehicles. Call our toll-free number or apply online , and one of our finance professionals will be more than happy to help you.