Novated Lease Help + Pros/Cons and Calculators

Hi All,

I have found the Notated Lease process to be very hard to understand and the providers very dodgy and not helping with providing real figures.

I have put together a list of Pros and Cons and a calculator that may help people. I have seen calculators before but none that calculate benefit after interest and fees etc.

Overall I find the notated lease and finance company benefit a lot and you get a small benefit if you pay attention.

Here we go:
Pros:
+ GST Credit on Running Costs and Load Repayments (not the cars purchase price)
+ Taxable income is reduced so lower Medicare levy ~$150 per year (Car of ~$43k income $~$105k)
+ Can get a good purchase price for car (although you can then use this to negotiate your own better price)
+ If otherwise paying cash you can earn interest on your cash instead (remember that interest is taxed so if you get 3% after 37% tax that’s only 1.89%)
+ Part of your repayment is Pre-Tax so if you earn under $90k that’s 32.5% off and over 90K 37% off. E.g. 1x litre of petrol @ $1 costs you 67.5c/63c
+ If you use a discount gift card for fuel (or other expenses) you can claim the full amount back. E.g. Pay $95 for $100 Woolworth gift card and use for fuel. Submit Fuel receipt of $100 and get $100 cash back. The $5 is a saving + 32.5/37% off the $5 is also saved so total $6.63/$6.85 per $95 spend on gift card.

Cons:
- GST Changed on Post Tax contribution (can be half or more of your repayment so that’s your running cost GST saving gone)
- Hard to workout Interest Rate for finance (see * Below)
- Interest rate often higher that if you got in independently (see * Below)
- Fees are not disclosed and can be hidden in many areas. (Go green, establishment, move employer, admin, etc)
- if you start your lease then there is a delay in getting your first payment from your employer you can incur a FTB Shortfall that can be quite a lot e.g. 3 weeks without payment and be ~$400 in tax. I suspect a good notated lease provider could account for this and take more from your employer but if not it’s a loss.
- Notated lease providers charge admin fees NLC is around $15-25 per month

Warnings:
Watch out for redundancy insurance which can often prove little benefit for a large cost. E.g. $1,000 cost to cover a max of $3,000. Note the value of your car will always (unless damaged etc.) be more than the residual so cover for the difference is useless.
Get your own insurance or at least compare as NLC was 3 times the price I got.

To work out your effective interest rate :
Cost of Car (Inc GST) $42,500
Less Residual (inc GST) $23,506
= Total Payment for car $18,994

Total Rent (inc GST) (from Contract) = $22,968 less Total Payment for car
=Total interest $3,974

Use calculator here: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/personal-loan-calculator#!how-much-will-my-repayments-be
Amount borrowed = Cost of Car (inc GST)
Set loan length to term length
Fees to $0
Now set interest rate at 10% to start and see on the left how much interest in $ that is. Then change the interest rate up or down until you get to the same amount as your Total Interest (or within a few $)

FTB Short Fall:
FTB Year is Apr-Mar
Post Tax payments must be at least 20% of the cost of the car within this period. If not you will get an FTB Short Fall (Tax) See FTB Short Fall calculator for more info

Calculators: https://ufile.io/pea8x if someone has a better place to store it please do or let me know as this expires in 30days.

FYI My Lease Company (NLC) said my benefit over 2 years would be around $7k I found it to be around $1.5-2k. My renewal after the 2 years (for 1 more year) was estimated to be a benefit of around $200 but I worked out it would cost me around $1500 in a best case scenario.

Comments

  • +2 votes

    ummm… I think I'll just get a 5th hand Corolla.. Thanks though :')

  •  

    Thanks for the post. Novated leases are fairly complicated and in a lot of cases they work out for individuals because they're not paying for it - and it's better for cashflow/liquidity reasons for the company. Definitely need to be aware of extra expenses and costs that eat into the perceived benefit when going into one though.

  • +1 vote

    Con: You are locked into a lease arrangement and if your situation changes it might be expensive to get out.
    Con: At the end of the lease you need to find enough cash for the residual payment, sign up for a new lease or other headaches I'm not aware of.

    • +2 votes

      Limited KM per year depending on agreement?

      •  

        Yes. Getting kms wrong might mean penalties, either financial or not driving as much at the end, or more than you want.

    •  

      Good points, these are the risks you are taking for your benifit So people would need to decide if it worth the risk of extra costs vs the benifit.

      I found the lease provider made it sound really bad if you leave your company (to see insurance to cover that) but I found it's not that bad if you do. Its still a big loss but you can pay out the lease (including interest for the whole term) for a 1 month lease payment penalty. Or keep paying the finance directly to the finance company (Lose benifit of no GST and running cost deductions etc). Second option is not that bad assuming you have been able to use 50% plus off the term before cancelling then you should break even.

  • +3 votes

    Pick affordable car, pay cash.

    Common sense tells me novated lease will be more expensive, no matter how you calculate, they are a company, with nothing but a goal to earn money.

    •  

      yea lease has a lot of 'moving parts' = more things to worry about

    •  

      It's actually not funded by the company but the government so if you take it up or not your still paying for it in you taxes. Labor tried to kill it but libs stopped them. Tax payers properly paid $8k for my $1,500 saving so total scam and should be scrapped and the money used more fairly so everyone can benifit.

      •  

        Doesn't matter tax payers are paying or not…the benefit is made by middlemen here. The packaging company designs the package to make money for them, not for you.

  • +2 votes

    I have a NV lease with orix.
    5.x% interest
    One year lease contract.
    Self organised insurance.
    I use Egiftcard for fuel

    Their profit from me is whatever rate kickback they get + $19 a month.

    I'm quite sure I'm winning.
    So the price for the car was cheaper than what car buyer brokers could get.

    Pm me and I can send you my lease calculator spreadsheet

    The lesson I learnt from all my research is to only do 1 year leases. Perhaps extend them into a further year, but only one at a time if there's still any financial benefit.

    •  

      Given the 65% of residual value with 1 year leases as well as no GST when purchasing from dealer and some of expenses from pre-tax salary can NV lease for 1 year be considered as a a method to pay less for expensive car? Or all those additional costs for financing and management fees eat up potential savings?

      •  

        When you look at any of these companies and you enter your info and it says something like "you could save $8k".

        If you look below in small writing it always says "in first year".

        1 year lease only way to get benefits.

  •  

    RE: Point 2 of Pro:

    • Taxable income is reduced so lower Medicare levy ~$150 per year (Car of ~$43k income $~$105k)

    It should also help if you're eligible for Child Care Subsidy:

    More than $66,958 to below $171,958

    Between 85% and 50%
    The percentage goes down by 1% for every $3,000 of income your family earns

    •  

      Child care subsidy rate is calculated based on your gross income.

      •  

        And the gross income would have a pre-tax deduction for the novated lease (mine is reduced by around $250/fn)

        •  

          I'm not sure what you mean but the subsidy isn't calculated on your taxable income. It doesn't count any deductions.

        •  

          @Quantumcat:

          Happy to be corrected and I understand my circumstances is probably different to your's.

          Subsidy calculation, like most of other centrelink payment, is based on adjusted taxable income.
          ATI is taxable income + net investment losses and reportable fringe benefits and reportable super contributions (which are generally not taxable for employee) etc.
          So it will count general work related deductions, just won't take rental losses/investment losses.
          https://www.humanservices.gov.au/individuals/enablers/what-a...

          With novated lease, if you make pre tax and post tax contribution, it is excluded from reportable fringe benefits, so not even on your payment summary.

          A good use of novated lease can affect a lot of ATI based centrelink benefits, ie CCR and family tax benefits and even HECS/HELP repayment.

        • +1 vote

          @azvc: fair enough, I got wrong information.

          We use your family income estimate to work out how much subsidy you’ll get. This means at the end of each financial year we’ll balance your payments using your actual adjusted taxable income.

          From https://www.humanservices.gov.au/individuals/enablers/how-yo...

  •  

    They should tell you their interest rate if you ask them.

    •  

      Too shady in details as well. I asked and it was confirmed the rate would be 7% I guess. But when I changed job and new office didn't provide a packaging option, my lease was converted to a loan and I found it was way too high…somewhere around 15-18%.

  •  

    I have a novated lease. My problem is their estimated costs are higher than what was needed. Hence I have over $6000 in credit which can’t be used to pay the residual and will be given back to me through my pay. 50% of my lease is pretax and the rest is post tax payments. I will end up paying tax twice. I have reduced my payments a lot in order to use the balance but have chosen an efficient and reliable car.

    •  

      Would you have chosen the same car if you didn't go through a Novated Lease?

      •  

        Yes - I’m not into cars. They get me from A to B. I got. Fuel efficient, low maintenance, $18500 no GST and good reviews. I’m not going to buy a fancier car because I can salary package.

  •  

    Well I have had a very bad experience with Novated lease which I got packaged form Boost Salary packaging… those guys are dodgy and made simple looking process so difficult and super bad deal. It was all painted nice and shiny to my novice eyes but was dishonest. Avoid.

    Always ask what will be my repayments if somehow my job is changed and i have to close the lease i.e. move to private loan. That is going to help you heaps.

  •  

    Petsonally I cannot see the benefits of paying for a car that you won't own. I know it can make financial sense in some cases but it just doesn't sit right with me.

  •  

    Problems I had with novated leasing - ive had 2 so far with 2 different providers (NLC and Selectus) over the last 6 years:
    - Very difficult to contact with queries/enquiries. You can email/message and wait 5 business days, or phone and sit on a queue as long as Centrelink
    - Once your lease ends, expect to wait 3-4 months to get any of your excess balance back.
    - I found the lease more restrictive than you would expect, and ended up just paying for everything (tyres/servicing/rego/insurance) myself then claiming back.
    - The fuel card that you get will most likely not be accepted at all service stations.
    - None of the benefits/discounts I could get through the lease were any better than other discounts/deals available.

    Traps to be aware of:
    - Both cases I could source the car cheaper than the lease provider
    - If you source your own insurance, be aware that if you write off the vehicle you still need to pay off the ‘finance’ component of the lease – i.e. a standard insurance policy for market value wont cover you enough. Never trapped me but was a risk that I was fully aware of and willing to accept.
    - Usually only a portion of your payments are pre-tax, so don’t think you are magically going to save all this tax.
    - Treat the vehicle exactly like if you owned it outright – e.g. getting petrol when cheap, shop around for tyres and servicing, etc. At the end of the day its still your money.

    In the sums I did for our new car, the only times that novated leasing makes sense is if the vehicle has particularly high operating costs. This could be high/frequent servicing cost combined with bad fuel economy. This argument to me was stupid though, as the only time it made sense was when the vehicle was uneconomic? So you are still better off getting a more economical vehicle and paying cash, even if the cash would have otherwise sat in a home loan or offset account.

    Would I do it again? Hell no. You will find that most people don’t do leasing long-term, as it doesn’t usually stack up financially.

    •  

      Excellent points, similar to my experience. My employer has made it extra difficult by locking in the insurance provider, who is about 3 times as expensive as budget direct/Allianz. Not to mention the monthly $$ to the leasing company, the hidden charges and the obscure interest rate. Was with enlist, would not do again.

  • +2 votes

    We recently went through the process of another novated lease car. This is after novated leasing our old car for 7 years.

    I will keep it simple and list the few important things I found through this process:

    • You will almost split the benefits. Don't worry about little fees and charges. They are running this as a business after all. It's nowhere near a big benefit as it used to be or what they claim it to be but it's still worth it to some people.

    • You can search the whirlpool automotive discussion forum for the cheapest price you can possibly get on the car of your choice. I found that they have enough dealership connections to meet your demands.

    • They don't disclose the interest rate unless you ask them. We had to ask twice before it was answered. Surprisingly it was a lot lower than we were expecting.

    • Check the vehicle finance details. They will include loads of various insurances in which you might not need and you can opt out on request. We opted out $6,500 of insurances in our car!

    • They will finalise the deal with a hard sell of paint and trim protections to the tune of around $2,500. Ignore it. It's not worth it.

  •  

    Hello all. I am wondering if anyone in this thread can offer some advice as I have no idea.

    I am thinking about doing a novated lease next year. It would be for a 30kish family car.

    My scenario is as follows:

    70k income
    HECS Debt
    1 child full time child care
    Receiving family tax benefit for 3 children
    Generally only drive 10,000km a year

    Would it be worthwhile doing a novated lease to reduce my HECS repayments and would it increase my child care subsidy / FTB? I.e. Would it be worth it?

    •  

      Without knowing all your details, If 70k is your families total combined income, you may find that the lease payments on a 30kish vehicle will consume a large portion of your income.

    •  

      The biggest downside on a novated lease is the cost of finance. So if you would otherwise get a bank loan at more than 8% then you would likely be better of with a novated lease over 2 years. If you have cash to buy the car outright then you would need to some detail analysis to see if you would be better off.

  • +1 vote

    Working in this industry, for the better part of 20 years, I find many of these comments comical and totally misleading, with no offense.

    Here are some facts to consider, not speculation.

    1 There are 2 types of FMO's (Fleet Management Organisations) that provide Novated lease facilities

     a: Those that use 3rd party finance such as Macquarie, St George and a few smaller others
     b: Those that are self funded, owned by a financial institution.
    

    2 The companies which fall into the group mentioned in (a) Secure the funding at lets say a rate of 6%, the financier earns the return on that money, not the FMO, therefore when you have a monthly lease management fee of lets say $15, do you all honestly think that $540 in management fees over a 3 year lease is going to make you a top 100 company? of course not. So how do they make their earn, the answer is simply that when a $30,000 car is financed, a brokerage fee is around 10% is added to the funding, therefore your $30,000 vehicle is actually funded for $33,000 and guess where the $3,000 goes?

    3 This now explains why your payout on the vehicle after 3 months, if you inquire with the lender, is thousands above the loan amount even though 2 lease finance payments may have been made, and why these self funded FMO's usually charge a $50 admin fee rather than $15 as this is the true cost of administrating a lease.

    Conclusion, find an FMO that is self funded as they dont necessarily add brokerage as they are earning a return on the rate on the funding.

    4 FMO's are all different in what they offer, you will be told that you cannot do a Novated lease without a residual, not true, A traditional Novated Lease, known as a Novated Finance Lease, does require the inclusion of a residual at the end inline with ATO guidelines, however there are a VERY FEW FMO's that provide what is termed a Novated Operating Lease (Google it) Its identical to a Novated Lease, meets ATO requirements, delivers the same financial benefits and at the end of the lease you hand the car and keys back with no balloon and no further obligations.

    5 Modern FMO's provide fully maintained Novated solutions, if you are going through a reimbursement process then your FMO must be still using 1980's technology, under a Fully Maintained package you should never have to dip into your pocket, except in an emergency', for any related expenses.

    6 The tax payer does not subsidise or pay for you lease, utter rubbish, The ATO find it easier to take a blanket approach where tax deductions for vehicles are disbursed during the financial year rather than 40,000 people claiming $5,000 at EOFY as part of their tax return. Every accountant will tell you that claiming $5,000 wont red flag you. A Novated lease, on average will deliver around a $3,500 benefit, and yes I have seen upwards of $15,000 in some instances.

    7 The pre-tax deductions constitute along with the GST savings your benefit, the post tax contribution has been washed through the PAYG system and the marginal tax rate applied to it. That PAYG collected on those funds represent your FBT liability and flows through with your taxable income PAYG to the ATO coffers. Hence why Novated leases are termed Statutory Method ECM (Employee Contribution Method) Novated Leases. There are NO funds attributed to your Novated Lease that come from the ATO to subsidise your packaging.

    The way the ECM is calculated is thus

    Car Value = $30,000
    Statutory rate = 20%

    Therefore $30,000 x 20% = $6,000 ECM annually

    $6,000 / 12 monthly pay cycles = $500

    If the total cost of your lease per month is lets say $800 this would then mean

    $800 - $500 = $300

    $300 would be deducted from your pre-taxed salary and $500 from your post taxed salary

    Now lets say you are doing 40,000 km's annually as opposed to the Australian average of 15,000 and that your running costs etc meant the total lease cost was $1500 a month

    The same stat rate on the same value would apply of $500

    But it would then be

    $1500-$500=$1000

    So your pre-tax would jump to a $1000 deduction and your post tax would still be $500

    If you are a project manager for lets say one of the big construction companies and use your vehicle 90% of the time for work, then rather than the ECM Statutory Method, a professional FMO would use the ECM Log Book Method, but many dont as its too hard for them.

    A 90% business usage would bring that $500 post tax down to something ridiculous like $50 in which case your pre tax would go to $1450 and post tax $50.

    The deal here is that you would need to keep a log book for 12 consecutive weeks in the first year of the lease to substantiate the business usage. Thats it.

    So please, dont trash novated leasing as some tax rort, subsidized by the tax office and that all FMO's are crooks, were not, you can still find a good FMO, but its a case of your employers who sign exclusive agreements with some, where they dont do the due diligence as to the true cost of the benefits that are screwing you all.

    And yes I will answer questions as long as they are logical and not based on witch hunting hearsay.

    •  

      Thank you for your input. It's good to hear from a professional.

      Sadly, what I've experienced from investigation is that people being offered a Novated Lease agreement through their Salary Packaging deal are, like myself, low income earners working for the public sector (I work in Allied Health in VIC, almost worst paid in the country!).

      I used to drive 100kms a day and sadly the numbers didn't provide the benefits.

      The system is great for those who are able to drive primarily for their job, but I think it benefits the minority rather than the majority.

      New staff at work who ask me about novated lease options, I never dismiss it directly but to investigate the numbers. The OP has done the hard work here with the calculator, and sadly it often doesn't benefit us overall.

      Final thought (Jerry… Jerry…), Novated leasing is a great option to get a new car and write off some tax, but look deep into the numbers and figure out if the benefit is worth the hassle, or potential risk if things go belly-up with your work situation.

      •  

        When tax rates were in the 40's % and you could reduce FBT by doing more driving, I found leases very good. I still use them now but outside of the first year, they do not give you much benefit.

        I strongly recommend a 1 year lease, but no longer.

        @Sirpent, assume you would agree (from a pure rate of benefit perspective)?

    •  

      Hi Sirpent, appreciate your explanation and it has opened my eyes towards novated leasing to an extent.
      Never had a prejudged notion on it but it does offer up more questions than answers for me.
      Excuse my ignorance or if my questions seem silly but I would love to pick your brain if I am able to?
      As an employee for a company who has work vehicles but the boss actually owns the cars outright, am I able to, as an individual, arrange my own novated lease and salary sacrifice and my boss act as a conduit regarding him setting it up through payroll so lease payments come out of my pay and that is all he is burdened with?

      Tia

  • +1 vote

    @signingoff

    The trick to a Novated lease is to minimise the FBT calculation which is based on the initial purchase price of the vehicle, a one year lease can deliver good benefits those doing lets say 40k or 50k a year as you accelerate the deductions based on consumables especially fuel etc which contribute to the pre-tax deductions.

    The ATO rates as shown below clearly demonstrate the depreciation and in year one its a huge hit, so you would want to do the kms to justify that hit.

    Term Of Lease Minimum Residual Value
    1 66%
    2 56%
    3 47%
    4 38%
    5 28%

    As an example

    Lets take 2 scenarios, in each case the salary before super gross annually is $70,000, but lets use 15,000 Kms p/a for Scenario 1 and 40,000 kms p/a for scenario 2 on a $30,000 vehicle and a consumption rate of 7L/100 kms in Victoria on the statutory method with no extra ordinary business use.

    Scenario one

    Annual Salary $70,000
    Annual pre-tax deduction = -$12,501
    Annual post tax deduction = -$5,530
    Net annual decrease in PAYG = -$4,320
    Net annual increase in disposable income = +$6,116 (Due to PAYG reductions of $4,320 + Reductions in running costs $1,796)

    Residual value = $19,954 (GST inc)

    Could you sell this vehicle for the residual value ?

    Scenario 2

    Annual Salary $70,000
    Annual pre-tax deduction = -$18,397
    Annual post tax deduction = -$5,530
    Net annual decrease in PAYG = -$6,348
    Net annual increase in disposable income = +$8,740 (Due to PAYG reductions of $6,348+ Reductions in running costs $2,392)

    Residual value = $18,140 (GST inc)

    Could you sell this vehicle for the residual value ?

    Under the 15,000 annual kilometer in scenario 1 I would be recommending a 3 year lease, even with scenario 2 I would be suggesting a 2 year lease as the monthly cost of each lease would be cost prohibitive to each driver based on the annual salaries used.

    If a driver was doing 80,000 kms a year I would tend to suggest the 1 year lease. The simple fact is this, aside from the finance payments, the running costs dont change under a Novated or owned scenraio, however, a Novated lease will without doubt reduce PAYG and deliver GST benefits.

    As a rule of thumb, you should NEVER look at a vehicle that exceeds a value representative of 40% of your annual income and you should always ask for multiple quotations based on differing terms so as to best realise which one will deliver you the best financial result based on your actual intended usage.

    •  

      @Sirpent

      what's your advice on a situation like this
      ( i am using 'round figures' or realistic average figures )

      Gross Salary: $100K
      No HECS Debt
      Car cost: $20K (e.g. 2016 VW Golf or Audi A1)
      Expected KM: less than 10,000 km

      1-year residual could be $14K
      3-year residual could be $10K

      So, is this a game of wondering whether a European car's resale value could match/exceed residual payment?
      or figuring out, the ability to afford a more expensive car (e.g. Mercedes-Benz A180) to drive ?

      The thing is, salary or the kilometres driven won't change much, but the cost of the car being bought & its depreciated value is what looks like to be a determining factor, to see if it's "worth it" or not.

      OR

      What tips/tricks would you recommend:
      ( would there be conflict of interest, in you giving advice, if you are working in this industry? )

      • find cheapest car, instead of fleet car ?
      • remove all insurance, and source the basic car insurance invidually (i.e. not through car lease company) ?
      • asking for purchase GST or stamp duty as a 1st year running cost (i saw something like this, somewhere) ?
      • +1 vote

        Subscribing to this post. I, too, would like more info on this.
        Having recently jumped to a much higher tax bracket and not having a car, I would like to get one and try to offset a bit of the cost via tax cuts, if possible, but this is all new to me.

        Thanks

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