Novated Lease – Pros and Cons
Novated Lease – Pros and Cons
We are often asked “Is a novated lease good for me?”
So, we thought we’d put together some of the Pros and Cons of a Novated Lease.
Novated leases in Australia offer several benefits for employees who have no other way of gaining a tax benefit from vehicle ownership.
Pros:
Tax Savings
One of the primary benefits of a novated lease is the potential for tax savings. Lease payments, as well as other vehicle-related expenses such as fuel, maintenance, and insurance, are deducted from your pre-tax income, reducing your taxable income and overall tax liability. The Australian Government has also recently introduced FBT saving on EV’s financed under salary sacrifice which is not available on non-EV’s under the same salary sacrifice arrangements.
Flexible Vehicle Choice
Novated leases offer flexibility in choosing the vehicle that best suits your needs. You can select from a wide range of new and used vehicles, including cars, SUVs, and commercial vehicles.
Fixed Monthly Payments
Novated leases typically involve fixed monthly payments, making budgeting easier and providing certainty about your vehicle-related expenses.
Employer Support
Many employers offer novated leasing as part of their employee benefits program, providing additional support and incentives for employees who choose this option.
Ownership Options
At the end of the lease term, you have the option to purchase the vehicle outright (payout the residual in full), Trade the vehicle in for another vehicle, refinance the residual value.
Convenience
Novated leases can be convenient, as the lease payments and other expenses can be included in the monthly payment and are automatically deducted from your salary, eliminating the need to manage these payments separately.
Cons:
While novated leases can offer several benefits, there are also some potential drawbacks to consider:
Commitment
Novated leases are usually long-term commitments, often spanning several years, you cannot contribute a deposit to the purchase and having a residual is a requirement of a lease. If your employment situation changes or you no longer require the vehicle, terminating the lease early can be costly.
Financial Responsibility
With a novated lease, you are still responsible for all ongoing costs associated with the vehicle, including fuel, maintenance, registration, and insurance. If you underestimate these costs, it could lead to changes to your budget.
Depreciation Risk
Like any vehicle ownership arrangement, novated leases are subject to the risk of depreciation. If the value of the vehicle depreciates faster than expected, you may end up owing more than the vehicle is worth at the end of the lease term, any payments outside of the lease agreement will be made from your post tax income and not form part of your salary sacrifice agreement.
Complexity
Novated leases involve several parties, including you, your employer, and the leasing company. Managing the lease and ensuring compliance with all requirements can be complex and time-consuming.
Impact on Salary Packaging
Salary packaging through a novated lease can affect your take-home pay and other employee benefits. It’s important to understand how the lease will impact your overall financial situation.
Fringe Benefits Tax (FBT)
Depending on your circumstances, you may be liable for FBT on the novated lease. This can reduce the tax benefits of the lease and increase your overall tax liability.
Unnecessary Addons Products
Be aware of unnecessary “Junk” insurances that can be added to your novated lease agreement, adding to the overall cost of the lease.
Additional costs to consider
Should you decide to leave your current employer (and your new employer doesn’t offer salary sacrifice arrangements) all payments, including the GST on the lease payment, are your responsibility and will need to be paid from post-tax income.
This can also include additional costs such as GST and lender break fees should you pay out the lease early. Which can reduce the tax savings originally gained from pre-tax payments.
Overall, novated leases can be a cost-effective and flexible way to acquire and manage a vehicle, offering tax benefits and other advantages for eligible employees in Australia. However, it’s essential to carefully consider your individual circumstances and seek advice from a financial advisor, tax professional and your finance broker before entering into a novated lease agreement.
