Considering a Car Lease? Car Leasing and Novated Lease Guide

It was not so long ago that the options for getting a new car were very straightforward and they were; you purchased one yourself either outright or with a standard loan or, you hoped that the company you worked for decided to give you a company car as part of your remuneration package!

Australian car lease guideNowadays, the options for getting finance for a new car purchase are seemingly endless. One such option that people are taking advantage of is the ability to take out a car lease. There are many benefits to car leasing and the different options available and benefits are covered in detail below.

Should you lease a car or buy a car?

There are benefits (and disadvantages) to both and this is ultimately something that you should have a conversation with your accountant about on an individual basis because it is impossible for me to predict the best option for you specifically. There are however a number of important reasons why people choose leasing a car over purchasing one outright.

Business car leases

One thing is for sure, and that is if you are a business owner and use your vehicle for business purchases then you may well be entitled to some sort of a tax deduction for your vehicle expenses including the costs for a car lease or car purchase. Again, this is for you to discuss with your accountant.

Related Articles:

Many Australians are now turning to rent to own cars as a way to gain ownership in a vehicle, without the upfront cost associated with a traditional vehicle purchase. For more information, view our rent to own car guide.

Australian business owners, and even employees are able to use certain aspects of their vehicle ownership or the everyday running costs as a tax deduction. For more information, view our Guide to using your car as a tax deduction!

Still on the topic of business ownership, one type of car financing option that a large number of business owners are utilising is known as a Chattel Mortgage. Find out more on this topic with our Chattel Mortgage Guide.

Whilst you are looking around at car hire options, if you are in the market for a hire trailer, now might be a good time to read through our comprehensive article on finding the top trailer hire company for your needs.

Types of car lease for business owners

How a car lease works:

When leasing a car, a lender agrees to rent a car to you for an agreed period of time for an agreed and set repayment. This is not like a car finance loan where you are paying off the car with a view to owning it outright – think of a car lease exactly as renting a home; temporary use with no ownership.

In some instances, you are able to purchase the vehicle at the end of the lease term for an agreed amount based on the projected vehicle depreciation. This is commonly known as a Hire Purchase Agreement, and what it effectively means is that your monthly lease payments are actually helping you acquire equity in that vehicle.

Operating leases vs finance leases

You actually have two options with regards to leasing a car; an operating lease and a finance lease.

Finance leasing: Just like the commonly referred to Hire Purchase Agreement, you enter a finance lease with a set and agreed lump sum payment at the end of the duration of the lease to pay that allows you to assume ownership of the vehicle outright.

Operating lease: These differ, as at the end of the agreed rental term, you return the vehicle and swap it for a new one having never owned the car at any stage.

There are some distinct differences between the two when it comes to accounting, so it is advisable to raise this with an accountant before entering into an agreement.

Obviously with any form of standard car lease where you lose the ability to take ownership in the vehicle, you also lose the value in the asset. When it comes to trading in a vehicle, sometimes that little extra revenue from the trade-in is worthwhile and something that tips the argument against a lease in the favour of an outright purchase.

Fully maintained car leases

This form of lease is a more robust form and includes not only the use of the vehicle, but also the ongoing maintenance of it. Small business owners often utilise this potion as it provides a true set-cost scenario where no budgeting for ad-hoc maintenance and servicing is required; one fixed monthly cost covers it all.

Obviously, the cost of such a lease is more, but it is still utilised by businesses in instances where it suits.

Car leasing options for employees – Novated Lease

novated lease overview australiaNovated leases are a tax effective structure used by employees of companies to finance motor vehicles.

They consist of a three-way agreement between the employee, the employer and the finance company.

In this form of lease, the employee owns the vehicle but the employer agrees to make the repayments to the finance company while the employee will sacrifice some salary to compensate the employer, however this will be before tax which means a significant saving for the employee.

Depending on the conditions, there is likely to be a fringe benefit tax liability however most employees will be well in front by the time this is accounted for.

What are the benefits of a novated lease?

Benefits for Employees:

  • For employees, they have a greater choice a vehicle compared with the traditional company car option, which means that buying larger vehicles that would otherwise be out of price range becomes a reality.
  • Financing of the vehicle is paid by pre-tax dollars meaning that there are some significant savings in your pocket compared to using after-tax dollars.
  • There’s an option to open the vehicle at the end of the lease term
  • The vehicle can be at least for a hundred percent private use
  • With most employers, multiple vehicles can be leased by using this form of car lease so it is actually possible to be paying for both family vehicles through this arrangement.

Benefits for Employers:

  • For employers it is an easy and cost effective way to add value to an employee’s remuneration package without the time and costs associated with management, acquisition of disposal of the vehicle.
  • Payments are ultimately not the employer’s responsibility and on termination of employment, the responsibility for the vehicle is passed back onto the employee

So how exactly can you save with a novated lease?

First of all, there is the savings you get on the purchase price where you actually get a fleet discount off purchase price. The total savings through the fleet discount can add up to several thousand dollars right away.

Then, you do not have to pay goods and services tax (GST), which gives you a further 10% saving.

In fact, GST isn’t payable on the fuel, tyres, servicing or any other vehicle ownership costs, therefore proving a handy 10% discount on the necessities of running a vehicle.

When it comes to servicing, you may also get a twenty to thirty percent discount off the servicing costs with preferred servicing partners.

You may even get fuel discounts directly at the pump through fleet discount deals in place.

And most importantly, all vehicle running costs are in pre-tax dollars saving you thousands of dollars in tax payments.

An example of how novated leases work:

Let’s have a closer look at the fuel savings, after all fuel is one of the most expensive aspects of vehicle ownership!

Let’s compare the two situations you pay a dollar twenty a litre (WE WISH!) to fill a sixty litre tank. That costs you two seventy two dollars, but that’s after tax…

To actually pay for that $72 of petrol you may have to earn a hundred and five dollars. Now, with this form of lease, whilst the pump price is again a dollar twenty you don’t pay the GST so there’s a 10% discount right out of the gate.

Then there’s the fleet discount on the fuel through the fuel partners.

So, to fill up your 60 litre tank, you are paying sixty four dollars 20 cents (as opposed to $72), but that’s pre-tax and is no direct Fringe Benefits Tax reliability on fuel costs, which basically means a saving of forty dollars and eighty cents every time you fill up your tank.

Over a year the fuel savings alone are HUGE.

When buying a car it is easy to lose sight of the big picture

There’s the lease payment every month. Then there are the servicing costs, then the tyres need replacing, then it is rego and Compulsory Third Party insurance renewal time…. and the cycle goes on and on. Over three years these costs can really start to add up!

A novated lease is different. You only make one monthly payment that covers all your vehicle related costs. With the fleet in tax savings you are starting from a much lower base and have the comfort of regular repayments coming out of your pre-tax salary.

Let’s say you earn $87,000 thousand dollars per year, and you purchase a car that is worth forty five thousand dollars. Let us assume that you drive approximately twenty five thousand kilometres per year for both business and private use.

By the time the tax and fleet savings are taken into account, the difference compared to conventional financing would be around a hundred and twenty dollars every week after-tax.

That’s six thousand two hundred and forty dollars extra in your pocket every year.

If you continue that trajectory of savings over a three year term, the total after-tax savings come close to $20,000!

Here is a further resource that summarises the top benefits of a novated lease, whilst this website has some great information on how the benefits of novated leasing are calculated.

Finally, good on the Abbott government recently over-turned proposed FBT changes that would have  essentially wiped out the novated leasing industry.

Personal vehicle leases:

Even if you are not a business owner, you can still take advantage of leasing a motor vehicle as opposed to buying one outright. People often choose to do this for luxury vehicles and one of the reasons being is that they do depreciate in value quite quickly. You would take out a person lease if there are no tax deductions available to you due to not using your car as part of your employment.

Article written by Damian Roberton