Novated Lease Vs Buying Outright

MechEng on 25/05/2017 - 15:21

Hi all
There seem to be little talk about how does compare a novated lease against buying outright.
The scenario is as follows.
Car value: 43K DA
Salary: 87K
Have more than enough funds in the offset account to pay outright.
Drive distance: 12,000 km/yr

Lease company has quoted me:
GST savings on vehicle: ~3600
Tax savings: ~7000
GST savings on running costs ~1500
Length of the lease: 1 yr
Residual Value of vehicle: ~26,650

Is it worth it for me to go for the lease instead of using my offset money? (IR in HL 3.9% pa)

Thanks

Financial

Comments

  • inherentchoice on 25/05/2017 - 15:34

    How much are the lease payments? You can't just look at the GST/Tax "savings". They may be savings but you need to subtract the additional expenses of leasing. The lease company is effectively collecting interest on a loan plus their own commission.

    I think you should also investigate if a local dealer will do it for less than $43k drive away. A lot of dealers do deals under the retail price.

    • MechEng on 25/05/2017 - 16:52

      Hi
      Yes indeed, the interest rate they charge is about 9%pa.
      The lease repayments are 785 per fortnight (ex GST) which I don't know what means for m, nor If I have to pay GST at any point in time. they quote the value of 863 as GST inclusive.
      this is about the best price I can get shopping around.

  • geoffs87 on 25/05/2017 - 15:42
    +4

    $43k for a depreciating asset when on an $87k income seems high!

    Is this vehicle needed for work, or just for you? Is a $20k car not sufficient for your 12,000km p.a.?

    I realise you didn't come here for financial advice, and i don't plan on giving it… just interested to see your rationale :)

    • Euphemistic on 25/05/2017 - 16:11
      +14

      Nonsense you should be buying an $80k car to impress your boss.

      I hear bikies can sort you a deal on a Camry, just make sure you look under the bonut.

    • cypher67 on 25/05/2017 - 16:31
      +6

      I have a financial adviser at Westpac that informs me that new cars are an excellent investment.

    • MechEng on 25/05/2017 - 16:59
      +1

      I am exploring opportunities.
      87K is my salary, my wife has also a salary. We are looking to replace our old car (4WD) that we bought used and have for more than 5 years, and I am analyzing what my options are. Used low km 4WDs are all bloody expensive, this one is just a couple of grands more than a 4 year old 70000 km car, so I thought on why not…
      The lease would be one year, and then I would pay the balloon and keep the car, like forever!
      My rationale may be flawed and that is what I came after…

      • BestofOZB on 27/05/2017 - 11:05

        People have different priorities mate, cars, sending children to private schools etc, go get the car that you want.

        I did a novated lease on my first car, mainly because I didn't have enough cash. Second car, I bought outright. I would say most of the time because of the high interest rate on a novated lease, you would be better off outright.

        In your case the math is simple, total payments + baloon = 863x26 + 26k = 49k.

        You are better off with the 43k outright.

        Congratulations on your soon to be new car.

        • Punknerd on 06/04/2018 - 09:26

          That is inaccurate. You are ignoring the savings from pretax deduction of the lease amount (yes I know the ECM amount is post tax). At 87k income, you are looking at ~33-37c per dollar pre-tax of the lease amount. This will be enough to push him down the lower tax bracket. He may well come out on top even with the lease fee and higher interest rate. There's also opportunity cost of the offset cash, what if the 43k is literally his only financial fallback?

  • blonky on 25/05/2017 - 15:47

    From your calculations, looks like the savings will be greater than the interest, especially since you're only going for 12 months.

    Don't forget to factor in the FBT you will be liable for (assuming it will be primarily private use) - or is that factored into your 'tax savings' calc?

    • MechEng on 25/05/2017 - 17:11

      That is the tricky part…
      I cannot follow their calculations.
      I have a Post tax deduction, which seem to take care of the FBT.
      The difference between what I get in cash now and with the lease would be ~350 / week

      • [Deactivated] on 25/05/2017 - 20:39

        How much is the pre-tax and pos-tax deduction? That's the critical piece in working out whether it's worthwhile.

        • MechEng on 25/05/2017 - 21:39

          Thanks
          I don't have the exact numbers here with me now, but is something like 650 pre and 300 post.
          Do you mind explaining why is this critical in your view?

        • [Deactivated] on 25/05/2017 - 21:40
          +1

          @dschmeda:

          See reply below

  • [Deactivated] on 25/05/2017 - 16:34
    +1

    Question to ask the leasing company - what's the cut for the running cost and what's the lease payment to the financier - that is going to be key. If you are able to heavily discount the price on the car - you may have built equity into the purchase and are able to recover it.

    Having done leasing for new vs. old car - I'd probably say novated leasing is best for a used car where you think there will be challenges to service/maintain it.

    Case in point - had a 2008 BMW 523i - 30k - purchased in 2013. Over 4 years as the lease term. The car was private use and weekend only really - I was able to enjoy the car - deal with the services as needed (around 400 AUD once a year, claim all fuel, and have 2 minor repairs done (faulty light module and repair of an air sensor) which was completely handled by the novated lease funds. It worked well. Residual value was 15k - perfectly aligned with market and sold at a profit. This is ideal - you can get into a slightly older car (with more features, etc.) and maintain reasonably well rather than being sprung with random costs to maintain it.

    New car - due to the three year warranty - I'd just pay finance for 3 years, get a payout figure, and see if I can sell it at a profit. With 12k km limit - it'd be considered a relatively new car.

    Also - one year lease term isn't too attractive as such - you may want to spread it over 2 years or so. If you stick to this timeframe of 1 year - I'd say buy it outright, and flip it next year for something better.

    Also - tax accountant - will give you better advice, etc.

  • altomic on 25/05/2017 - 17:12

    what model is it?

    • MechEng on 25/05/2017 - 17:14

      Pajero Sport GLS

      • Franky23 on 25/05/2017 - 17:36

        To throw a spanner in the works. Have you thought about a fuel efficient wagon? - subaru forester or skoda scout

        Subaru for the resale, but they're both incredibly fuel efficient and have loads of boot space.

        • MechEng on 25/05/2017 - 17:54

          We do quite a bit of 4wding, and the ground clearance may be an issue on those. Forester does not have a low gear any more…

  • LSGH on 25/05/2017 - 17:28

    assuming the tax savings is higher than the interest charged (+fees) or at worst case equal, wouldn't that be like paying 0% finance?

    • MechEng on 25/05/2017 - 17:53

      Yes that is the reason why I am thinking on this…
      But free money seem to be too good to be true…

      • LSGH on 25/05/2017 - 18:23

        3 people in my company do it, but they got 3-4 year terms….
        just double check if there are any extra fees…(e.g. $300 processing fee etc)

      • avocado on 04/06/2017 - 11:20

        Yet you don't question negative gearing?

  • chazfg on 25/05/2017 - 18:42
    +2

    At your tax bracket, I think you will be better off with novated lease than using offset account.
    The assumption is on the resale value and total running cost (and the kms). You may get more on resale value at the end of the lease depending on the car you choose. Just make sure you replace your tyres and do all repairs, including minor dents while the car is still under the lease. Also make sure comprehensive insurance and road side assistance are included.

  • [Deactivated] on 25/05/2017 - 20:37
    +2

    It's actually really easy to figure out whether it's 'worth it':

    Total cost without: 43k + $2000 in running cost * 3.9% interest = ~$47k
    Total cost of lease: $26650 (not sure if that includes gst) + 26 * pre tax contributions * 0.655 (ie 1-marginal tax rate) + 26 * post tax contribution = ???

    I'm guessing the numbers will be no where near each other, with the outright purchase being miles ahead (because leasing companies fleece you).

    If the number are anywhere close to each other, take a closer look … there's a few quirks that can make a novated lease win out.

    • LSGH on 25/05/2017 - 21:19

      would running costs only be $2,000? per year?

      e.g. (conservative estimates)
      Rego - $700
      Insurance - $600
      Fuel - $1200-1500
      Servicing - $300-400?
      Road Assist - $90
      Depreciation on Tyres - $200?
      Misc - $100

      • [Deactivated] on 25/05/2017 - 21:34

        would running costs only be $2,000? per year?

        Its just an example - the lease is over 1 year, so it's only fuel + 1 service+comprehensive insurance+car wash. Most new cars include road-side assist.

        Rego+ctp is included in the drive away price. You can negotiate with the leasing company to make the 1st year rego + ctp a running cost (this is one of the quirks I was referring to), which will make it slightly better, but it wont make or break the deal.

      • MechEng on 26/05/2017 - 08:49

        My calculations are around that for a 12 - 15 km per year…

    • [Deactivated] on 25/05/2017 - 21:46
      +2

      Updated with figures provided earlier in thread:

      Total cost of lease: $26650 (not sure if that includes gst) + (26 * 650 * 0.655) + 26 * 300 = $45519

      I suspect $26650 is ex gst and they've probably factored in more running costs than $2000, so it's not really an apple/apples comparison, but you get the idea.

      • inherentchoice on 26/05/2017 - 06:56
        +1

        Whereas outright purchase would cost $44,677 including lost interest on $43k.

        So that means outright purchase is $842 better off?

        • [Deactivated] on 26/05/2017 - 07:14
          +1

          I don't think you included 'running' costs in the outright purchase. The novated lease includes all running costs for 1st year.

        • MechEng on 26/05/2017 - 07:40

          @sp00ker: I'll run the proper number with this equation and I'll post the response.

    • MechEng on 26/05/2017 - 06:28

      Thanks that is a brilliant explanation.

  • [Deactivated] on 25/05/2017 - 22:17
    +4

    no, your taxable income is too low to make it worthwhile

    • MechEng on 26/05/2017 - 07:37

      Would you reckon there is an amount that makes it worth and why?

      • [Deactivated] on 26/05/2017 - 09:06
        +4

        In your example, say you were in the top tax bracket, the total cost with a lease would become:

        $26650 (not sure if that includes gst) + (26 * 650 * 0.51) + 26 * 300 = $43069

        A nice saving for high income earners, but it's unlikely to make/break the deal.

        Novated leases are normally padded with lots of costs - high interest, establishment fee, monthly fee, etc which can easily come to 3k/year … thus killing of the benefits.

        • [Deactivated] on 26/05/2017 - 09:29

          i would only recommend to to the 2 top tax brackets
          $87,001 – $180,000 - when earning over 95K is when its worth it imo
          $180,001 and over

          given you're on 87K, any bonus or extra pay will change your tax bracket.
          however if you only get 1-3K extra you can always deduct that amount at tax time to bring it down to the lower bracket.
          rather than spending 10-15K to bring it down.

        • [Deactivated] on 26/05/2017 - 10:00
          +3

          @tuzii:

          i would only recommend to to the 2 top tax brackets

          Nah - the different between the 2nd and 3rd bracket is only 4.5% (32.5 vs 37). Again, unlikely to make/break the deal.

          It really depends on the car and the fees and charges.

          Novated leases typically work best for people driving cheap cars and have high running costs (eg driving lots of kilometers). eg buying a hyundai i20 or i30 and driving 40k km (non-business) each year.

        • avocado on 04/06/2017 - 09:50
          -2

          @sp00ker:

          This is poor advice.

          If someone needs to buy a car, they should check all available options.

          In most cases, the novated lease comes out on top of financing the car regardless of KM's driven and price of the car.

          To put it simply. the difference between a novated lease and normal finance will be:

          1. The finance payment
          2. The novated lease company's admin fee

          If your tax savings cover the difference of these figures, you are in front.

      • avocado on 04/06/2017 - 10:06
        -2

        Worthwhile is subjective.

        What makes it worthwhile for you? $1…$1,000…$2,000?

        If you want to get the cheapest method to buy. Do your sums dollar for dollar and choose that option.

        People get bent out of shape about paying interest or fees, yet are happy to be ripped of by the ATO. Either way, these fees charges and taxes are just money out of your pocket. The aim is to reduce the dollar figure of these costs, not nitpick which organisation they go to.

        The rest, like sp00kers comments, are just noise.

        Alternatively, if you are happy to pay more using another method, like out of the offset account, because it provides you with some security, then do that.

        • [Deactivated] on 04/06/2017 - 10:22

          Worthwhile is subjective.
          What makes it worthwhile for you? $1…$1,000…$2,000?

          Looking at the dollar amount of savings is one way to see if it's 'worthwhile'.

          Another way:
          - Upside vs downside (ie how much it'll cost you to break the lease if you change jobs or are made redundant)
          - Taxable income after the lease, whether it lowers your income enough to qualify for more centerlink benefits.

        • avocado on 04/06/2017 - 11:10

          @sp00ker:

          This was meant for the OP, but thanks for your input.

  • drewbytes on 26/05/2017 - 07:58
    +1

    I novated lease 2 cars. I like it for the convenience factor, you pay $x per fortnight out of your pay and don't have to fork out $1000 for rego, $100 for fuel per week etc, it's all taken care of so no surprises or lump sums to be found for insurance etc. You'll always get arguments as to whether you're better off or not, but in my opinion you are. Although for a 1 year lease it may not be as applicable, but why such a short lease? Are you intending to get rid of it after a year and change to something else? I can't see why you would if you're only doing 12,000 km. If not, look at a 3-5 year lease.

    • MechEng on 26/05/2017 - 08:54

      Thanks for your reply.
      The reason behind the one year is work commitments, yearly contracts and I may move around, but also I may not, so that is why the one year.
      Either way if I move after a year I sell the car, probably higher than the balloon, or pay and keep or re-lease.
      Ideally I would do a 3 yr lease, but also interest seem to eat your savings pretty fast.

    • zambuck on 26/05/2017 - 14:56
      +1

      When I looked into a lease under similar circumstances to OP the only significant benefit I could find was that predictability and consistency of costs you described, plus the ability to effectively walk away from the vehicle at the end of the lease, hence no hassles with selling it. Apart from that, a lease is just a fancy "package" of finance, potential fleet discounts and somewhat streamlined billing for running costs. That packaging itself isn't free, and my local dealer managed to offer the same price as the leasing company could offer, so I decided against a lease.

  • Flip on 27/05/2017 - 08:34
    +1

    If i could get a car for the same price through the dealer at a very low interest rate i would in future avoid leasing. I find the lease is great once running, everything is just sorted and done by card however the lease company can be annoying to deal with and slow to start the process (documents, quotes etc).
    For reducing tax then the accountant has the answer for sure, it's great if it drops you to a lower tax bracket.
    Good luck to anyone who can calculate which is truelly cheaper. Go for a cheap purchase price and if leasing the payout price compared to private sale worth. Remember though any maintenance or fuel not used is reimbersed at the end.

  • LTV on 27/05/2017 - 16:00

    In my opinion sounds like novated lease will be more worthwhile provided residual value you mention includes gst. You always need to pay gst on residual value.

    Basically under novated lease your total cost is $26650+(350x52)=$44850

    If you were to buy outright, the drivaway cost of the car is $43k then you need to add running costs for one year which will be greater than $1850.

    In general a shorter lease will be more beneficial than a longer one as you are paying interest on shorter term and you will be using more pre-tax towards lease.

    • [Deactivated] on 28/05/2017 - 20:57

      In general a shorter lease will be more beneficial than a longer one as you are paying interest on shorter term and you will be using more pre-tax towards lease.

      Nah - on a 44k drive away car, the interest comes to ~3k/year (assume 9% pa interest rate and remove gst from car price). The interest payments go down each year, as you pay off the principal.

      The FBT on a 44k car is like 9k/year and it doesn't go down until after year 4 …

      This is what really makes long term leases expensive, compared to short term leases.

      • avocado on 04/06/2017 - 09:44
        -1

        FBT is a company tax. He is paying a post-tax contribution (using the Employee Contribution Method). This offsets the FBT to $0 for his company, therefore they do not pass on this cost.

        You are thinking about the "Capital Value" of the car which the ATO reduces after year 4. This means his post-tax payment will reduce after year 4.

        • [Deactivated] on 04/06/2017 - 10:14

          FBT is a company tax. He is paying a post-tax contribution (using the Employee Contribution Method). This offsets the FBT to $0 for his company, therefore they do not pass on this cost.

          How do you think the post tax contribution is calculated?

        • avocado on 04/06/2017 - 11:06

          @sp00ker:

          No need to get offended. Your post is misleading to the uninitiated.

          It made it sound like you pay the post-tax contribution + FBT because you are using FBT and Post-Tax Contribution terms interchangeably.

  • avocado on 04/06/2017 - 09:39
    -1

    Lots of misinformation when it comes to novated leases. It's actually quite simple to compare.

    Cash Costs

    Upfront Payment: $43,000
    Running Costs over term: ? (use the same as what is on the novated lease quote less admin fees)
    Interest on Offset Account: {43,000 x (1+.039/26)^26} - 43,000
    TOTAL: Upfront payment + running costs over term + interest paid/foregone

    Novated Lease Costs

    Lease payment incl. tax/gst savings (effect on take home pay): ($785? x 26) x 1 year
    Residual inc. GST: $26,650
    TOTAL: Lease payments incl. tax/savings + residual

    That will give you an apples for apples comparison.

    • [Deactivated] on 04/06/2017 - 10:25

      I gave that same formula much earlier in the thread.

      Thanks for that - you're a champ. Give yourself a pat on the back.

      • avocado on 04/06/2017 - 11:08

        Thanks.

        It obviously wasn't as clear as it could have been because the OP was still asking "is it worth it?" questions.

        Hopefully this helps the group.

        Pat on the back given :)

        • [Deactivated] on 04/06/2017 - 14:08

          Your formula is wrong anyway. There's no home loan compounds fortnightly…

        • avocado on 04/06/2017 - 16:07

          @sp00ker:

          I don't know how often his home loan compounds, so I just used the same payment frequency as the lease.

          Why is the formula wrong? Can you correct it so the group has the correct formula?

          Can't he just substitute 26 (fortnightly compounding) for 12 (monthly compounding) or 365 (daily compounding) depending on the compounding frequency of his home loan?

    • hunter88 on 24/03/2018 - 15:58

      Hi,

      Thanks for the above formula…however, I was wondering if I should also factor in the interest gained leaving the money in the offset account and minus that amount from the Novated Lease Costs? Since you took that figure away from the Cast Costs section, wouldn't the opposite be true for the Novated Lease Costs section?

      • avocado on 05/04/2018 - 18:49

        Yes. the interest you save by NOT purchasing the vehicle from your home loan is also a factor that should be taken into consideration.

        I was trying to be conservative in the calculations.

        There is a below post by tunzafun001.

        He would be better off under a novated lease using the "Operating Cost Method" where he would simply be able to pay 74% of his total expenses before-tax and GST free.

        There are no GST savings on expenses when claiming as he has done.

        Most accountants don't actually know anything about how a novated lease works, so they usually "advise" their clients that this option is better. Being an accountant, they are automatically trusted. Having accounting qualifications myself, I know both methods implicitly.

        He can claim 74% of the interest on the loan (not the whole payment) and then must claim depreciation for the capital cost of the item. You can depreciate to $0 if you want, but you'll have a tax bill when you sell the car for more than that. What I'm saying is that you can't buy a car for $50,000, depreciate it to $0 ($50,000 deduction over X years), then sell it for $20,000 tax-free - you would need to adjust your depreciation to $30,000 and pay the tax saving back on the $20,000 you received on disposal.

        Further, tunza has to remember to keep his receipts and records all year and see an accountant to do all this for him (hassle and cost). Under a lease, you get your saving in each pay and you don't need to see an accountant or worry about receipts etc. as it's all done via the leasing company.

        Last, but not least, tunza is rorting the tax system as he has devised a scheme to avoid tax (driving his car differently in that 3 month period with the intention of going back to normal driving after the period). He is not "genuinely" driving 74% - it is likely the ATO would frown on this.

  • avocado on 04/06/2017 - 16:15
    +1

    Also OP. To add to the formula above.

    Are you going to pay extra off your home loan if you finance the cost in this way?

    It would be a different formula in that case.

    The simplest way to get the interest component if you were to use the offset account is to get a loan calculator and put the $43,000 in @ 3.9% with the same balloon (or no balloon if you prefer).

    You then add running costs to that.

    • MechEng on 05/06/2017 - 10:21

      Thanks

  • tunzafun001 on 06/06/2017 - 22:08
    -1

    I found that lease companies never factor in that you can still get a tax deduction on buying it outright, plus your expenses. Surely almost everyone would have a situation where they use their car at work. I personally went for the logbook option, you then chose the busiest work travel time in a 3 month window and use that to do your tax for the next 5 years. I rode my bike to work for 3 months and drove to 2 work trainings 400km away. Net result 74% of ALL car expenses, plus vehicle depreciation claimable. Novated Lease wasn't even close. Even with the 12% method or 5000km you are still better off.

    • techboy on 07/06/2017 - 08:26

      No such thing as the 12% method any more. Also, the 12 weeks are supposed to be a typical 12 weeks.

  • Architectonic on 08/06/2017 - 11:15

    "tax savings"

    Why do some people expect the government to subsidise their car purchase?

    • MechEng on 08/06/2017 - 12:29

      A better question is: Why the government subsidize car purchases?

    • avocado on 19/06/2017 - 23:53

      Why do some people expect the government to subsidise their investment properties?

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