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Saving Money And Buying A Vehicle Of Your Choice With Novated Leases
If you are a government employee, novated leases are usually part of your employee rights. Also known as salary packaging, a novated lease is a vehicle lease that exists between three parties: you, your employer and a leasing company. There may also be a third party lease management company involved in some cases to manage the process.
What is Novated Leasing?
Under a novated lease, the leasing company organizes the finance and other details of your car purchase. Your employer then deducts the lease payment through a monthly debit from your pre-tax and post-tax salary. The payments become manageable for you, you can drive the car you want and everyone involved benefits from the arrangement.
Employers offer novated leases in order to increase employee salaries at very low cost to the company. They do not have to take on the risks that are usually associated with company vehicles, and cars under novated leases are much more cost-effective.
You as an employee benefit from novated leases because it offers you a hassle free way to finance and purchase your car. It also lets you take care of running costs and other costs with a regular payment that is deducted from your salary. There are also several income tax and GST savings that you can make through novated leases.
There are several kinds of novated leases, depending on the vehicle costs you choose to include under your lease. A novated finance lease is a lease under which only the vehicle is leased. A fully maintained novated lease includes the running costs along with the vehicle cost. And a fully maintained novated operating lease includes not just the vehicle and its running cost, but the lessor (which is the leasing company) also takes on the residual value risk.
It is important to note that vehicles under novated leases still attract Fringe Benefit Tax (FBT) but these taxes are conditional. Therefore, FBT incurred depends on FBT method used, type of car, number of kilometres travelled in a year, your salary, lease interest rate etc.
What is Salary Sacrifice?
The term salary sacrifice is often used when it comes to novated leases. It is only a synonym for salary packaging and refers to the process of actually making savings on taxes while you sacrifice your salary for lease payments for your vehicle. Salary sacrificing can help reduce the FBT you pay as well, if you contribute to the car’s operating costs with your post-tax income.
What Tax Advantages Do Employees Get With Novated Leasing?
Income tax savings is one of the primary reasons why corporate and government employee novated leases for vehicles are so popular.
With a novated lease the tax benefits that you get are enormous. It is important to remember that the financing for the lease, running costs and other costs are deducted from your pre-tax income. This means that the overall taxable income that you receive is reduced and you pay much lower income tax.
Of course the expenses that can be deducted from the pre-tax salary depend on certain conditions. They depend on the value of the vehicle that you have chosen to lease and the total number of kilometres that have been driven in the vehicle. Consultants that work with novated leasing companies are experienced in salary packaging and offer tailored quotes based on your circumstances. They can help you determine the cost of packaging a vehicle and the tax savings that you can make.
How is Novated Leasing Convenient?
The convenience offered by novated leasing is enormous, saving you from the hassles of paying for repairs, running costs and other expenses as and when you incur them. First, lease payments are budgeted into the monthly salary for the duration of the arrangement, so employees do not have to worry about meeting vehicle financing costs even while they continue to use their vehicle for work and leisure.
Employees can also choose to bundle other expenses apart from the primary financing into the novated lease. These can include running costs, repairs, insurance, service maintenance and other costs. Spreading these costs over the term rather than having to scrape up the money during sudden repairs can be a big convenience.
Buying a vehicle also becomes easier with novated leasing. There are no pushy car dealers to deal with as in the case of new car purchases. With novated leasing, you get to choose the car you want and the salary packaging company will make it available for you.
You also have the potential to access great discounts. This may be possible if your employer has several vehicles under novated leasing and the leasing company offers volume discounts. These discounts will then be passed on to you.
In most cases, the vehicle stays with you even if your employer changes. The responsibility of meeting the lease payments then get transferred to you. However, you can also have your vehicle and its novated lease transferred to your new employers to free you of any hassles.
How Flexible Are Novated Leases?
Novated leases are flexible on several counts. First, employees can decide the term of the lease over which to make the payments. Secondly, unlike the system of company cars, novated leases offer great flexibility to the employee in the choice of vehicle. Under a novated lease, you can choose any car, new or used (with certain conditions). Even though the vehicle will be leased to you through your employer, you can use it for any purpose you want, whether work of leisure.
Unlike vehicles in company fleets, the vehicle that you lease can be modified to suit your tastes. You can add DVD players, for instance, or window tints. The payments will be made through your pre-tax income and this increases your purchasing power by several times.
Do I Make GST Savings?
Novated leases are also extremely useful in saving you the 10 % GST that is otherwise required to be paid on new vehicle purchases. You can benefit by saving GST on the purchase price of the vehicle (within the luxury limit), the cost of labour and parts or any servicing costs as well as fuel purchases. This 10 % saving can be significant when it comes to petrol.