The sheer pleasure of that experience is perhaps part of the reason for the growing popularity of novated leasing. The option of driving a new car – and then another new one a few short years down the track – is made possible by this convenient means of financing, which differs from personal car finance in some significant ways, offering both tax and lifestyle benefits.
Hassle-free buying
While theoretically anyone can negotiate a novated lease, the most common arrangement in Australia is a three-way agreement between an employee, their employer and a lease finance company such as Smart, who handle all aspects of organising the new vehicle. In this set-up the employee pays for the lease of the car through instalments from their pre-tax earnings, reducing their overall taxable income.
“A novated lease can be taken out on a brand new or used car, and it can also be purchased through a dealership, through private sale or even an auction. It’s quite open to the type of car you get, and how you come across it.” says Mike Daly, consumer education specialist.
“Most people find the worst part of buying a car is the process of dealing with car dealers and buying the car,” says Daly. “But we can take care of that whole process and do it internally – find the right car for the customer at the best possible price, leveraged through our relationships with dealers, and then the whole process is handled by one person all the way through.”
That means registration, insurance, servicing and other maintenance can all be handled by the lease company.
“A budget is agreed upon with the customer when the lease is set up,” says Daly. “We base that on the length of the lease, how far the customer thinks they’re going to be driving, and also the type or car they’re buying – how much fuel it uses, how many replacement sets of tyres they’re going to need, what the servicing schedule is going to be – all those details are tailored and managed for each individual customer.”
Depending on a person’s circumstances, novated lease contracts run for between one to five years.
“Some people drive a lot so they might want to turn their cars over regularly,” says Daly. “Other people might be at the time of life where they have three kids and they need a seven-seater and that’s not going to change for the next five to six years, so they might feel very comfortable entering into a five-year lease.”
Tax benefits
A key advantage of a novated lease is its tax effectiveness. Novated leasing is approved by the Australian Tax Office as a means of car finance. By making a monthly payment from their pre-tax pay to lease the vehicle, the lessee reduces their total taxable income, potentially reducing their income tax bill by a substantial amount. The self-employed can also take advantage of this benefit.
“A lot of people focus on the pre-tax savings but that’s only one of the [tax benefits],” says Daly (above). “The other benefit is that you don’t pay GST on any of the running costs you have through a novated lease, so your fuel is 10 per cent cheaper just because you’re running your car through a novated lease. You also don’t pay GST on the purchase price.
“It’s one of those things – you don’t think 10 per cent off your fuel is that much but when you multiply it over every tank of fuel during a five-year lease, it’s going to add up to a significantly higher figure.”
Electric vehicles have proved particularly popular for those entering a novated lease because of the Federal government’s 2022 Electric Car Discount Bill, which allowed eligible electric vehicles (i.e. those under the luxury car tax threshold) to be paid for 100 per cent from pre-tax earnings and exempt from Fringe Benefits Tax. Plug-in hybrid vehicles (PHEVS) were also included in the concession.
Lease expenses for petrol or diesel cars need to be paid from a mixture of pre-tax and post-tax money, usually divided about 50 per cent each.
A word of caution
It’s important to remember a novated lease is a type of loan and so the company providing the finance will assess your ability to manage and repay the amounts involved just like any other loan. This means consumers should do a proper assessment of their financial situation and their current commitments, before embarking on a novated lease.
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