Novated lease - is it worth it?

Discussion in 'Accounting & Tax' started by IpNoob, 26th Apr, 2020.

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  1. IpNoob

    IpNoob Member

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    Hi all,

    Hope you're coping well with the pandemic.

    I've been thinking about novated lease and I'm not sure if it's worth it. Below is my current lease information:

    Vehicle price: $25,000 - 2nd hand car.
    Lease term: 4 years
    Lease repayment: 46 monthly instalments of $544.69 = $25,055.74
    Residual value: 37.5% of $25,000 (as determined by the ATO for 4 year leases) = $9,375 plus gst of $937.50 = $10,312.50

    So if I want to own the vehicle when the lease ends, I would need to make a total payment of $25,055.74 + $10,312.50 = $35,390.74.
    That's an increase of around $10k compared to original price of $25k

    So is my calculation above correct for the car itself?

    The salary sacrifice company advised me that I can save around $9-10k of vehicle running costs on taxes (after taking into account of fbt) over 4 years but I think they intentionally don't mention the residual payment.

    If the calculation above is correct, I would save around $10k over 4 years and pay extra $10k for the vehicle which makes it break even.

    Personally I think it's not worth it if this is the case. I will end up not being better off and my mortgage servicability over 4 years may get affected. Also the pay out costs before the lease ends are high as well.

    What do you think of novated leases?

    Cheers,
     
  2. Owlet

    Owlet Well-Known Member

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    Minimal benefit unless you are on over 180k salary and/or work for not for profit.
    You are looking at a second hand car anyway - buy it outright with cash and you will be ahead.
     
    Last edited: 26th Apr, 2020
  3. Hamish Blair

    Hamish Blair Well-Known Member

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    Better to do 2+2 years as break costs lower if your circumstances change.
     
  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Your serviceability will be significantly affected. Novated leases are a bit of a disaster for servicing purposes. For this reason alone I'd never touch a novated lease.

    You're paying $10k extra over 4 years to own this car. I assume the lease includes fuel, servicing & registration. How much would you normally spend on this sort of thing? In my own case it would be less than $10k, but I don't drive as much as some people.

    Here's my formula for financing a car...
    1. Buy a cheap second hand car with a view to driving it for 5 years. Pay cash.
    2. Every time you spend money on the car (fuel, servicing, registration), put the same amount in a savings account.
    3. In 5 years you'll have enough money in the account to buy a decent car.
    4. Repeat.
     
  5. bunkai

    bunkai Well-Known Member

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    There is some benefit but you get the vast majority of the total benefit with only a one year lease - then buy out the car. Locking in for multiple years is not smart and serviceability gets nailed either way (hence go for a one year lease).

    Make sure you manage your own expenses such as insurance.

    It would probably, depending on your salary, to lease the 25k for one year. Make sure you all the major maintenance that is due and then keep the car for a few years after paying it out.

    You may also be able to claim work related km - which you can't do with a novated lease.
     
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  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The present economy indicates why a NL or any form of car package may be appalling

    1. Lose job, you now have a car and debt and nobody paying the car finance
    2. Counts agresssively to debt servicing (as the term is short) for the car repayments and all outgoings
    3. The salary sacrifice income to pay the debt isnt considered income but your package salary reduces. So both 2 and 3. double count for servicing. Ouch
    4. Try selling a car in this economy. Dealers couldnt give Holdens away 2 months ago. Prices are falling fast. Look around suburbs and see all the for sale signs from jobless looking to cash in their car.
     
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  7. PeterT

    PeterT Active Member

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    Great commentary @Peter_Tersteeg and @Paul@PFI.

    I have always wondered when the car-finance debt bubble might implode. My feel is there will be a real pressure point on the "other side" of Covid19, once the govt starts to turn the taps off. .

    Interesting article from Top Gear's Chris Harris last Friday. (Remember, this is a guy who makes his living road-testing cars which are, by and large, unaffordable to the average Joe. At least, I think that's the most entertaining part of what he does, anyway). And he seems to think that (in the UK, at least) there's a bubble waiting to pop...
     
  8. bunkai

    bunkai Well-Known Member

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    Assuming your not applying for finance in the next twelve months....

    Run the numbers on a 1 year lease. Make sure you include all of the major servicing and maintenance that will be due (e.g. 4 tyres, brakes etc)

    You get most of the total benefit of a 4 year lease in a 1 year lease.
     
  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You get most of the total benefit of a 4 year lease in a 1 year lease.[/QUOTE]
    The balloon could be a debt issue. It's a liability
     
  10. Never giveup

    Never giveup Well-Known Member

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    @IpNoob how are you? Did you take on the Novoted lease?
     
  11. Redwing

    Redwing Well-Known Member

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  12. Redwing

    Redwing Well-Known Member

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  13. devank

    devank Well-Known Member

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    How does NFP make any difference?
     
  14. Trainee

    Trainee Well-Known Member

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    fbt exemption?
     
  15. Owlet

    Owlet Well-Known Member

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    FBT Status For Non-Profit & Government
    FBT status can differ depending on what industry you work in. If you work for a charitable organisation or government, you could be exempt for dollar limits on salary packaging. This means that you are able to salary package a vehicle without needing to pay any novated lease FBT, therefore saving money on tax.
     
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  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Consider the impact on borrowing capacity which can be quite significant due to a large imapct on servicing capacity and
    The payments are mere rent for an asset that has no potential future value beyond a modest trade in / sale value. Trade in values are very very low.
     
  17. tk421

    tk421 Well-Known Member

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    we are on our second 2 year lease from a company plan and it works out fairly well for us ..

    at the moment the bonus for us is fuel prices, we can go away for the weekend and people are screaming about $2 fuel, yet it makes no difference to us. I figure i must have put $200 or more in fuel the last trip and the car barely costs us that in a reduction in my take home pay.. ie, to cover the post tax cost to me it is very easy due to other income

    a lot of the cars vary a massively as to what is pre-taxable, i spent hours going through them all and one brand model was 50/50% pre/post tax and it fits our need perfectly, came with a tow bar and roof racks at no cost also.. when i look at the same car new it would be pushing 45-50k just to drive it out the door with these extras at the moment.

    would also recommend that you think your employment is secure, i'm pushing 12 years at mine :\ and that if you did get asked to move what options do you have.. we have an internal lease swap that can be done, or you can buy it out so you need to figure that could happen..

    i looked at other lease companies and their system seemed to rely on finance approval for them to purchase the car for you, the prices seemed decent but they are running finance checks on you in the background and then leasing that car you and managing the costs etc??, just seemed a bit odd to me as i say they are taking a cut in the interest rates also.
     
    Last edited: 14th Feb, 2022
  18. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    There is a allowance in the costing for all operating costs and nobody usually asks what this is. Its usually a high costed allowance. eg Tyres are assumed to be $250 each when its easy to buy them for $125. Fuel $2 when its easily bought for $1.80 etc So if fuel price drops the employee (not employer) may be wearing a high rate of allowance. And if it rises they still bill the employer (a minor win given fuel is a trivial element of costs). Its like tires. They include a notional replacement every XX Kms. If you blow tyres the employer gets billed more as its outside the allowance. In many cases cars are traded without replacements and the lease company wins and give you nothing. You didnt use the allowance. Cars can be sold wholesale and at a profit and they keep that unless you buy it from them. The largest cost is depreciation. At present resale values of cars could benefit the employee BUT when the car is traded they lose the benefit and the finance company gets it. They always make this work for them on average. And if you exceed usage allowance then they bill extra. etc You cant win much. Most lease / finance arrangements encourage car recycling every three years so operating costs are more certain.

    Most finance deals are novated. This means if employment is terminated you inherit the car and the debt. If you sell it there is no deductible loss. Remember its just a hiring arrangement. Over 10 years you are paying a furtune for something you will never ever own
     
  19. rksing

    rksing Well-Known Member

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    The 'benefits' of a novated lease generally increase with higher taxable income.
    Family and I, have had a few over the years, for various circumstances. If you have the cash to buy the vehicle and wonder if using the cash or getting a novate lease is better, this is a rough calc I do in the first instance (not full proof and may not work for everyone).

    I can get the salary sacrifice company to run the quote of for me on based on the vehicle, price, likely Kms (for fuel usage), lease length, etc. The number I am interested in is the change to my take home pay, i.e. how much my take home pay will decrease with this arrangement.

    For example lets say 100,000 purchase price (including stamps, rego etc), reduce take home pay by $1500 per fortnight (this includes lease payment, running costs, maintenance etc), $39k for the life of the lease (assuming one year lease).
    Add this $39k to the end residual after a year $65k to get $104k. So technically in a year from now you can own the car for 104k, $4k more than original purchase price. Now if your running costs, maintenance, etc are greater than that 4k you may be on a winner.
    But question is can you live of 1500 less per fortnight, maybe not so you push of the lease time 2 or 3 years and reassess.. and the numbers change and the $4k goes up.

    Now I did mention this scenario is for people you have the cash to buy the car as well. So if you went with the novated lease you will have the $100k cash, which could offset the PPoR or be invested elsewhere. The PPoR savings or investment returns can then be used against the 4k, to work out your overall position at the end of the lease.

    Like I said may not be 100% full proof or work for everyone, but a quick calc I do for myself.
     
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