Novated Leases

Novated leasing can be a great idea if you’re looking to get a car while reducing your taxable income and the amount of tax you need to pay. A novated lease allows you to pay for a car and all of its running costs out of your pre-tax income. You can save thousands of dollars in income tax and GST each year, simply by novating your car.

It sure can. Novated leases are designed to help savvy car buyers reduce their taxable income by allowing them to pay for a car out of their pre-tax salary (it’s sometimes called a ‘salary sacrifice’). If you earn $70,000 per year (before tax) and your annual novated lease payments add up to $10,000, your taxable income lowers to $60,000.

Let’s say you earn $80,000 a year. You’d be paying over $18,000 in tax and then paying for your car (ownership/lease and running costs) out of the $62,000 remaining after tax (the average Australian spends around $36,000 on a car and then around $5,000 per year to run it). If you put the same car on a novated lease, you pay for a portion of the car and running costs out of your pre-tax salary, reducing your taxable income. This reduces your $18,000 tax bill in a serious way – on a three-year novated lease you’d save around $6,600 in income tax for the life of the lease (over $2,200 a year). In addition, you also avoid GST on your car purchase and running costs. In this example, the GST saving over three years amounts to around $5,000!

Put these savings together and you will save around $11,600 in income tax and GST over 3 years, just by novating your car. That’s an additional $11,600 cash in your pocket. In addition to this, a significant portion of your car expenses have already been paid as part of the novation, so the extra money in your pocket won't have to be spent on your car.

No, they’re quite different. A car loan comes out of your post-tax salary so you pay for the loan after you’ve paid tax on your earnings, whereas a novated lease comes out of your pre-tax salary, so you pay for your lease before tax and that reduces your tax bill. In almost all cases your tax savings greatly exceed the interest you pay on the lease, so you’re almost always much better off.

You can include the car plus all of its running costs. That means fuel, servicing costs, tyres, insurance, roadside assist and even your rego. The more you include, the bigger your tax savings. But we’re flexible – some people like to arrange their insurance or servicing separately, and that’s okay. Our novated lease plans page outlines three popular options (just the car, the car + everything, the car + your choices) with a simplified comparison to help you weigh up the benefits of each. Check out our novated lease plans here (link to page 3: novated lease plans)

It’s important to note that some items are not considered to be legitimate car operating costs by the ATO and are therefore unable to be included in a novated lease. These items include, but are not restricted to, road tolls, parking expenses, fines & infringements costs and vehicle options or accessories fitted after the delivery of the car.

At the end of your lease there will always be an amount of money owing on the lease that needs to be paid. This is referred to as the ‘residual’ or ‘balloon’. In essence, the ‘residual value’ is a conservative estimate of what your car will be worth at the end of the lease (the “depreciated value”).

Under ATO regulation, a novated lease must always include a residual value and the ATO has specified formulas that must be used to calculate this residual value. More often than not, the ATO specified residual value is lower than the actual market value of a car at the end of a lease. This means that most people end up in a strong position at the end of a lease, as they can sell the car for more than they owe on the residual. If you chose to sell the car at the end of a lease, any cash you make after paying the residual is yours to keep, tax free.

Another advantage of the residual is that it helps to keep your lease payments low. This is because your lease payment is not calculated on the total cost of the car, but on the cost of the car less the residual.

The balloon payment is just another way to say ‘residual value’. It’s a conservative estimate of what your car will be worth at the end of the lease (and the amount to pay when the lease ends). Residual values are set by the ATO and are based on their estimate of how much vehicles depreciate over a lease term. The standard ATO residual values are calculated as a percentage of the “drive away” price and are as follows:

1-year lease: 65.63%

2-year lease: 56.25%

3-year lease: 46.88%

4-year lease: 37.50%

5-year lease: 28.13%

One thing most people don’t realise about the balloon payment is, it’s almost always lower than the current market value of your car when it comes time to pay it. So if you choose to sell your car, you can pocket a nifty profit.

Fringe benefits tax (FBT) is a tax the Government places on any benefit you receive from your employer related to personal use. In other words, if your employer pays for something that you use in your personal life, it creates an FBT liability for your employer.

Before FBT, employers got into the habit of paying personal “life expenses” for employees before declaring how much they paid them. For example, an employee might have earned $50,000 and had mortgage payments totalling $10,000 per annum, and the employer would pay the $10,000 mortgage repayments for the employee and then declare the employee’s income as only $40,000. This resulted in the employee paying less income tax, which was great for the employee, but not so good for the Government missing out on this tax. So the Government introduced FBT to claw some of this lost tax back.

Any situation where your employer pays for a car on your behalf that you use outside of work may well result in an FBT liability for your employer. Novated leases can create this liability too, however we counteract it by using part of your post-tax salary along with your pre-tax salary. We refer to this post-tax salary sacrifice as an “employee contribution”.

We specialise in looking at your unique circumstances and calculating the exact amount of employee contribution you need to make to offset any FBT liability for your employer.