Novated Lease vs Chattel Mortgage?

Hi All,

My current car is financed through a chattel mortgage (I had the cash to buy it at the time, but I preferred to take out a CM for the car and buy an extra IP which has worked out well) however a family member works for a company that does novated leases and can get me around 3.5% interest rate (retail is around 6% I think?). I'm due for a new car in about 6 months so starting to get my head around what will suit best. I don't want to pay cash - would prefer to finance most of it to free up funds for investment/development.

I'm on the highest income bracket (low base salary, mostly commission) and my next car will be around $60-70k new. I prefer not to include running expenses in the CM/NL as I believe this can affect serviceability due to financiers allowing for them in living expenses as well.

I do ~25,000kms per year, with about 90% of this business usage.

Any thoughts and advice would be appreciated.

Thanks

 

Most of the value of the NL is including the running expenses as they are pre tax (once you pay the FBT.)

You can get the vast majority of the dollar saving of a lease on a specific vehicle with a 12 month lease. Then your impact on serviceability is only for the 12 months.

However - are you an employee and who pays for the 24000 business km today?

 

Chattel Mortgage was HP in a wolf clothing. Back when GST was introduced the GST on a HP couldnt be claimed up front. A CM was introduced to bend the laws and comply. In the past few years GST laws were amended to fix it. Its a legacy name. There are many names for vehcile finance. Each can have tiny differences but are largely all treated as a debt obligation.

All forms of vehicle financing tie up servicing for one or more people (yes!). A lease is commonly referred to by many people but very few cars are truly leased. A lease is an asset you DO NOT OWN until the final payment. You pay a fee to use someone elses property. A CM and HP are a asset legally owned by the borrower and the asset is used as loan security. On the final payment the financier discharges the security over the asset.

A employer novated lease is registered in the employer name and its their property but the debt is counted to the employee. If they lose their job congrats they just bought a car and keep the debt on it.

 

a good way to fund a car which would be tax deductible would be to borrow by a loan secured against your main residence. It allows you to keep the cash you would have used in an offset account against non-deductible debt, and the interest would be main residence rates. You could also claim the interest as per normal.

Even better would be not to have a car at all, but that is not practical really unless you live close to the city.

 

I have seen a few clients who rarely use a car for private or work purposes who rent a shared vehicle (eg GoSet) when required eg travel to a work site. The cost is then 100% deductible

 

Unfortunately I do not own a PPOR, only rent Terry. Thanks for the suggestion though

 

Unfortunately not possible when I do 25,000kms a year (3-5 hours some days, and on short notice etc) so not an option, I need a car.

Thoughts on CM vs NL?

 

Both are as bad / good as the other. The novated lease requires the employer to allow and offer salary packaging. Salary packaged cars are priced up and the fleet company makes good money from give a expense allowance that isnt all used or it inflated. But the GST (trivial) is creditable for the employer. But FBT will gross up the cost. Any consumer can get car finance otherwise.

I'm not fan of a NL. Company cars are like renting a car and paying top dollar every year for something that you will never ever own.

 

Hi Paul,
Thanks for your response. To answer some of your points:
1) My employer offers is
2) If I do a NL, it would not include running expenses. I understand this is where people get ripped off

I'm still keen to understand everyone's thoughts on NL vs CM...

 

There is no such thing, when you lease someone got to make money out of finance and administration of the vehicle, the numbers has to stack up for them.

If they don't get your money via one avenue they get it in another it got to meet a certain rate of return.

Just like banks when they lend money it need a certain rate of return else they don't offer it.

Also the rules changes about leasing some years ago, it doesn't matter if you use for work or how many K you travel, you get charged a big fat 20% FBT and can use the car for whatever

 

The very nature of fringe benefits suggests thats not as tax effective. It seems illogical to only treat the car as a property fringe benefit vs a car operating fringe benefit. Some employers may manually handle the operating costs v's allowing the finance company to manage it using allowances to each cost limit

There are many variations on fringe benefits and each has to be considered on ist own merits.

At the end of the day you surrender salary pre-tax for a car you will never own and you are personally liable for the residual debt etc if you lose your job or quit.

 

Do you have an IP that you can draw equity from?

I do similar Kms to you and use my car mostly for business. When I did the maths, the NL was not a good deal- effectively, you don’t ever own the car and at the end of the period, there is a balloon payment which is thousands of $$. Furthermore, the lease company charges and arm and leg for services, maintenance etc. typically, you can only purchase fuel from Shell or Caltex (often more expensive than independents).

As Terry mentioned, you could draw equity from PPOR/IP, buy the car, and all expanses will be deductible, including interest from the loan.

 

I drove past a car yard on Parramatta Rd which was offering car finance over 25 years.

What sort of #*@$+ would take on a debt like that?

 

Thats people aged 25+ maybe ? Cant see how a 25 year loan term can ever be responsible

 

Yes there is. I have a NL and don't include maintenance, that's at my cost and offsets some of the FBT plus payments are made from gross income. If you travel and the car is parked and not used there are provisions to reduce the FBT even more. Just go for a standard NL and not a full maintained NL, the bank still get their interest.

 

But there is no saving in that really, last time I checked they provision petrol, maintenance and rego are reasonable, what you have paid out of the pocket but lump in with pre-tax money so it may works better, the killer is 20% FBT on value of the vehicle for how ever long you have the lease .

I don't lease after running the number, but each has their own way no judgement
I use cash, prefer cash for car, I told my kids if you have to lease a car you can not afford a car, keep saving

 

I ran the numbers a few years back that using our offset home loan account rate vs novated lease which had much higher rates at the time(over 6%), turned out cheaper to use offset cash to purchase.

Our company now gets 4.6% novated lease rates these days so I ran the numbers again. Novated lease wins hands down by about 10k over 5 year period vs offset account at 3.74%, for a vehicle purchase price of 50k.
I factored in running costs which are exactly the same if it's leased or not, added the ballon payment at the end, minus the cost to sell the car in 5 years time refrencing car sales showing the similar cars with 5 years of age and km inclusive of depreciation.

I'm finally a believer that novated leasing works as long as you keep your employment for the term of the lease to benefit. If you look at costs to own a car per year instead of "I own this car outright" then novated leasing can certainly save you some dollars.

 

Costs cant be identical. The company can claim GST on operating costs. FBT impacts net costs etc....

A NL can save some $$$ v's ownership when the after tax flows are compared but this has to be balanced v's an asset you dont ever own but are 'hiring" yet using your own borrowing capacity for.

 

Costs such as fuel/tyres/servicing don't have to be included, if they are included what ever isn't used is given back.
Even if you do include them the result for me works out cheaper regardless.