By Brad East
The pros and cons of novated leasing might seem alien to many workers. But if you are racking up the kilometres as part of your daily working life, it could potentially be a life-changing decision.
For many, the pros and cons of novated leasing stem from tax benefits and reduced travel costs although changing jobs and admin fees need to be monitored as your lease progresses.
Novated leases give employees a chance to make a chance of making a major expense without needing to pay a large sum upfront instantly and tie it in directly with their direct earnings.
It’s a scheme that many companies now offer employees to take advantage of should they wish to explore to it further. So what are the pros and cons of novated leasing?
How novated leasing works
In a nutshell, novated leases are a way for workers to get a brand-new car and pay for it using their direct earnings. The lease is organised in a three-way deal between the employee, their employer and a leasing company to finance a deal on a new vehicle.
As part of the agreement, an employee will essentially use a portion of their wages to pay instalments on a brand-new vehicle. The owner is then free to use the vehicle as often as they want.
When investigating leasing options, you will discover that there are two types of leases to explore. These are:
· Fully-maintained novated lease: A deal where the price of the car and all associated running costs are covered under the terms of the lease.
· Non-maintained novated lease: A deal where only the price of the vehicle is paid for. All fuel expenses, insurance and registration fees need to be paid for by the employee
Understanding what these types of leases are is crucial for you to know whether a novated lease works for you and their overall worth.
The pros and cons of novated leasing
The Pros
Reducing your tax overheads
For many people, one of the biggest advantages of a novated lease is that you find yourself much less tax when running a vehicle. If you take out a fully-maintained novated lease, then you essentially don’t pay GST on anything related to it including:
- The overall price of the vehicle
- Petrol or fuel consumption
- Insurance or registration
By doing this, it gives you the opportunity to reduce your overall tax payments by up to 40% in the right situation.
It’s not just GST you avoid paying too. With the instalments coming out directly from your wages, it means that you will end up paying less income tax annually too.
Encouraging the use of greener vehicles
One thing that novated leasing has encouraged is for many people to switch from petrol/diesel-powered vehicles to using hybrid or electric vehicles.
The reason for this is simple: government schemes are rewarding the switch. Federal laws across Australia exempt novated lease hybrid or electric vehicles from fringe benefits tax. In most work-covered expenses, you would have to pay added tax costs on whatever you spend. However, greener vehicles are exempt from this rule.
What this does is eventually reduce the overall price of the vehicle (and its running costs) to lower than the same equivalent should you want to buy it outright with your own money. It’s why many businesses suggest their workers choose a Tesla or a BYD when exploring a novated lease!
Not just a work expense
What many people don’t realise is that when you get a vehicle through a novated lease, it isn’t restricted to your working life. You can use it for personal errands too.
What this means is that you can buy a car and not just use it for your daily commute. You can use it for family trips and the school run with everything covered through the lease. It is a great way to potentially reduce weekly overheads for those often behind the wheel.
Cash in or upgrade?
Once the terms of the novated lease have ended, you generally have several options to explore – several of which see you emerging as the primary beneficiary. And the choice is completely down to you.
If you want to own the vehicle outright, there’s the opportunity to pay a residual fee and end the lease once and for all. Or you can sell the vehicle and still pay the residual fee to the lease provider. If there’s a profit on the sale, you get to pocket those margins.
Of course, there is also an option to renew the lease for a longer period. Should you choose to renew the lease, you can change your vehicle for a newer model without having to pay fees for the previous vehicles.
The cons
You can’t avoid the residual value fee
When you finalise the terms for your lease, the leasing provider will explain that there will be a lump sum needed to be paid at the end of the period. This value is known as a residual fee and can’t be avoided if you don’t renew the terms of your lease.
The fee itself has to be paid in one lump sum at the end with the value determined by the terms of your lease. Therefore, the shorter the lease, the higher the end fee. It’s calculated as the leftover percentage of the purchase price of the vehicle when the lease terms end. For example, a 2-year lease may require you to pay 50% of the vehicle’s worth after the lease period ends.
Thankfully, the amount is fixed and is determined as part of the lease contract before it starts. So think carefully about this fee figure and make sure you can pay it off when the time comes.
Leaving a job switches the burden
When you take out a novated lease through your employer, the burden falls on them to make payments to the leasing company. But that all changes should you leave your company as the burden falls on you.
Once you leave your employer, the repayments are solely on you to make until you find a new employer. But that doesn’t mean they automatically become liable for the payments. Should your new employer refuse to participate in the novated lease, the payments remain with you until the lease contract is finished. Therefore, think wisely about your choices when taking out a lease and eyeing up new career opportunities.
FAQs
Who is entitled to novated leasing options?
Novated leases are only available to workers if they are on a fixed salary with employers. Workers who are either casual or paid hourly are not eligible for a novated lease.
Are you always given a free choice of vehicle?
Not always. The choice of vehicle often comes down to who the business partners with for their leasing options. Should a company have a deal with certain manufacturers or partners, then the choice for you may be limited. This often falls as one of the trickiest pros or cons of novated leasing to manage.
Do I have to change cars at the end of my novated lease?
No – you always have the opportunity to stick with your original vehicle as part of your novated lease. Once a lease ends, you can simply extend it and stick with the same vehicle just as much as you can change it. Should you not want to lease it, you can buy it and own it outright as long as you pay the residual fee. This flexible model acts as one of the more flexible pros and cons of novated leasing to ponder over.
Undediced about Novated Leasing?
When it comes to understanding the pros and cons of novated leasing, there’s a lot to consider. It’s always important to work out whether a lease is going to be cheaper in the long run compared to getting a loan or buying it with cold hard cash. However, a novated lease helps keep overheads down and helps make huge tax savings in the long run. As long as you stay within a stable role and understand how a residual fee works, then there’s nothing to stress about with your novated lease.
To help you find the best-novated leases around, Dealify’s lending experts can give you a run-down of everything that you need to know. They can take you through all the options available to you and help find the best deal today. That’s why Dealify’s lending experts are ready to help you negotiate all the pros and cons of novated leasing today.
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