If you want to save money when buying and owning a car, then a novated lease could be for you. Despite some confusion in the market, novated leases are actually an easy, simple solution that puts the power of paying in pre-tax dollars to work.
The good news is novated leases aren’t just for high earning executives; more and more people are turning to novated leases to finance their car, because they’re tax effective and cost effective.
How they work
Novated leases are an agreement between you, your employer and your finance company. The finance company lends you the money to buy your car, and then your employer makes your repayments for you, directly from your pay.
You can have both your lease repayments and running costs deducted from your pay if you wish. Part of these are deducted from your pre-tax salary, and then your PAYG income tax is calculated on your reduced salary. This in effect reduces your taxable income.
This structure can save you plenty of money, and you’ll have more disposable income. However, your lease may be subject to Fringe Benefits Tax (which is also deducted from your pay pre-tax), so it pays to do the full calculation before signing up for a novated lease. You can choose a repayment term that suits you, usually from one to five years.
Once you’re happy with the details, you can get busy finding your new car. Under a novated lease, you can choose the kind of car you want, be that new or used, 4WD or coupe, and everything in between.
Fully Maintained Vs Non-Maintained
Depending on your employer, there can be two options to choose from when setting up a novated lease. The first is a fully maintained novated lease, where operating costs such as fuel, servicing, rego and tyres are included in the package. This is an attractive option because it makes operating your car simpler, and it makes budgeting easier. With a non-maintained novated lease, the additional operating costs aren’t included in the package, and only the lease repayments and any FBT are.
- Pay less on the purchase price: with a novated lease, you don’t pay GST on the purchase price of the car, which could save you thousands
- Save on tax: with part of your lease repayments being paid pre-tax, you can reduce your taxable income and save money
- Save on running costs: you can save on GST by including your running costs in your novated lease. It’s much easier this way too, with only one simple payment to make
- Affordability: with a novated lease, your repayments are fixed and designed to be affordable for you.
- Flexible terms: you can choose flexible end of lease terms, subject to the ATO’s guidelines
- Ownership: Your new car is yours, and you’re free to use it whenever, wherever you want. You keep any equity built up in the car during the course of the lease, and if you later sell for a profit, the profit is yours to keep.