Getting a car while in active employment as an Australian is quite easy, thanks to novated lease agreements. So here's how it goes: you lease a vehicle and it's novated to your employer, who makes all the lease payments on your behalf. The perk: the payments give you tax benefits. And not only that, the lease may even cover operational costs, including registration, fuel, insurance, service, and maintenance.
So How Does It Work?
A novated car lease will involve three parties, namely, you (the employee), the leasing company, and the employer (or financier). The employer will purchase a vehicle from the lease company. After signing a Deed of Novation, the employer deducts part of the employee's monthly salary and sends it to the leasing company to pay off the lease. The deduction of monies from your salary reduces your total taxable income, reducing the tax you pay. Conversely, if you opt for "typical" leases, you will need to pay with the monies deposited in your bank account after tax has been deducted.
The lease generally has a term of 2-5 years, as stipulated in the agreement. If new models constantly excite you, this arrangement offers you the perfect opportunity to take up new models by either trading up the old car or getting into a new lease agreement.
Can I Get a Novated Lease on an Old Car?
Yes, you can take a novated lease on a used car as well. If you need a bigger take-home pay or are on a budget but still need a car, getting a new one can be detrimental to your finances. A novated lease for an old car is no different from that of a new car, except that it has a lower impact on your salary. However, it may entail spending more on car accessories for it to remain in peak driving condition.
How Do You Set Up a Novated Lease?
First, you need to decide on which type of car you want and can afford. You may want a new car, but can you afford it? If yes, then go for it, but if not, Carpart.com.au can connect you to reputable used car sellers.
You need to be a Pay as You Go (PAYG) employee. Talk to your employer about your intentions because they need to remit part of your salary to pay the lease. After you and your employer agree, you can initiate the agreement. This is assuming that you already identified the lease type that works best for you and your situation. It must allow you to comfortably pay the monthly fees using your income and still have some money left for your other needs.
What are the Benefits of a Novated Car Lease?
In addition to saving on maintenance costs, including paying for car parts such as tyres, you may also enjoy the following:
1. Lower Monthly Car Payments
The monthly lease payments are generally lower (by half or thereabouts) than the monthly car payments required for purchasing a new car of the same make and model.
2. You Can Buy the Car If You Wish
Sometimes you find that the car you leased is so good that you'd not want to let it go. Well, some leases provide an option to buy when the period ends. If you want more time to decide whether it's worth purchasing, you can always refinance the car with a new lease.
3. You Get Additional Tax Benefits
Once you enter into a novated lease agreement, your car’s running costs will be factored into the computation of your taxes, effectively reducing your taxable income and allowing you more tax savings.
What are the Disadvantages of a Novated Leases?
There will always be disadvantages in every deal as there is no perfect deal. For one, when you cease being employed, the employer will also stop paying the lease. You will have to talk to your new employer to take over the lease, and at times it may require you to terminate the lease and pay the remaining amount and additional charges.
Some leases come with additional charges, so you need to do your calculations first before taking up the contract. Discuss with your accountant and settle for the best lease, or you may end up regretting.
Eric Anyega