Novated leases for vehicles – are they worth it?.

 

A novated lease is a financial arrangement where an employer leases a vehicle on behalf of an employee, with the lease payments deducted from the employee’s pre-tax salary. This setup can offer significant tax benefits, especially for high-income earners like doctors. Essentially, the employer, employee, and a finance company enter into a three-way agreement, known as a deed of novation, which transfers the lease obligations to the employer while the employee uses the vehicle.

 

Key Considerations Before Opting for a Novated Lease

 Before committing to a novated lease, it’s crucial to evaluate several factors:

  1. Interest Rates: Novated leases often come with higher interest rates compared to traditional car loans. This is how leasing companies make their profit, charging a premium for the convenience and simplicity of the arrangement.
  2. Comparison with Other Financing Options: It’s advisable to compare the lease terms with other financing options available through banks or financial institutions. Sometimes, a traditional car loan might offer better overall value.
  3. Usage of the Vehicle: Determine whether the vehicle will be used primarily for private or business purposes. This distinction can significantly impact the tax benefits you receive.

 

Comparing Interest Rates and Financial Options

 Interest rates on novated leases can be quite high, which is why it’s essential to shop around and compare quotes from different providers. For instance, Bartons Lending Services suggests comparing the rates offered by novated lease providers with those from car dealerships or brokers. This comparison can reveal substantial differences in cost, potentially saving you a significant amount of money over the lease term.

 

Tax Benefits and Implications of Novated Leases

 One of the primary attractions of novated leases is the tax benefit. For doctors on higher tax rates, the ability to pay for a vehicle using pre-tax dollars can result in considerable savings. Here are some key points to consider:

  1. Pre-Tax Salary Deductions: Lease payments are made from your pre-tax salary, reducing your taxable income and, consequently, your tax liability.
  2. GST Savings: You can avoid paying GST on the purchase price of the vehicle, which is factored into your lease repayments
  3. Fringe Benefits Tax (FBT): While FBT applies to novated leases, the tax savings from reduced taxable income often outweigh the FBT costs.

 

Electric Vehicles and Novated Leases: Special Tax Exemptions

 Electric vehicles (EVs) are becoming increasingly popular, and the Australian government has introduced incentives to encourage their adoption. One significant benefit is the exemption of EVs from FBT. This exemption can lead to substantial tax savings for both the employer and the employee. Additionally, EVs leased under a novated arrangement do not add to your reportable income, which can affect your HELP debt repayments and Division 293 tax liabilities.

 

Potential Drawbacks and Final Thoughts for Prospective Lessees

 While novated leases offer many benefits, there are potential drawbacks to consider:

  1. Ownership: At the end of the lease term, you do not own the vehicle unless you make a balloon payment. This means you could end up paying a significant amount in lease payments without acquiring an asset.
  2. Interest Rates: As mentioned earlier, the interest rates on novated leases can be higher than other financing options.
  3. Complexity: Understanding all the terms and conditions of a novated lease can be complex. It’s essential to thoroughly review the lease agreement and seek professional advice if needed.

 

For doctors considering a novated lease, it’s crucial to look into the details and compare all available options. Working with a firm that offers integrated advice, such as Bartons, where both accounting and lending services are available under one roof, can provide a comprehensive analysis to determine if a novated lease is the right choice for you.

 

This general advice has been prepared without taking account of your objectives, financial situation or needs. You should consider the appropriateness of this advice before acting on it. If this general advice relates to acquiring a financial product, you should obtain a Product disclosure Statement before deciding to acquire the product.