Novated Lease Cheaper than Buying Outright? Calculations inside

Lmatchhead124 on 24/02/2020 - 16:10
Last edited 24/02/2020 - 16:15

Dear OzBargain members..

I have done some calculations and want to make sure I am not missing anything. It appears that in my case it might be cheaper to get a 36-month novated lease than buying outright.

Here are my calculations

Novated Lease quote including running expenses and insurance: $1,180 x 36 months $42,688
Residual Value of car after 36 months to own car after 36 months $15,888
Minus:
Tax Savings on my income ($400 x 36 months) ($14,400)
Fuel cost I currently pay (I won’t pay as now its included in NL) (120 x 36) ($4,320)
Comp Insurance cost I currently pay (I won’t pay as now its included in NL quote) (66 x 36) ($2,376)
CTP/Rego cost I currently pay (I won’t pay as now its included in NL quote) (120 x 36) ($2,376)
Interest Savings 36 over months by not buying outright and putting cash in Offset ~($2,000)
________
Net Vehicle Cost to own with NL $33,104
________

Cost to buy outright with same specs (List Price) ~$35,000

Seems like NL is cheaper over 36 months. What am I missing here?

Automotive

Comments

  • [Deactivated] on 24/02/2020 - 16:20
    +4

    If you leave employment unexpectedly and terminate early, you are going to lose far more than what you’ve calculated above. Not worth the risk.

    • Soluble on 24/02/2020 - 17:06
      +3

      Left mine after 18 months, either new employer takes it on or you lose the sacrifice benefit and pay after tax. Was a long 18 months.

  • tsunamisurfer on 24/02/2020 - 16:25

    Is there any Fringe Benefits Tax?

    I did the same calc when I was looking at my car and buying outright with cash was WAY ahead.

    • matchhead124 on 24/02/2020 - 16:28

      According to the quote, Its $0 but I am unsure how that works
      Edit: Actually just checked and they structure pre/post tax payments so no FBT

    • matchhead124 on 24/02/2020 - 16:41

      Are you finding any obvious thing I missed. Seems to good to be true lol

      • gotcha on 24/02/2020 - 17:28
        +1

        On my fourth NL car now since 2012. No regret whatsoever.

  • spackbace on 24/02/2020 - 16:31
    +1

    To check your numbers, have a look at the calculator here

    I find it's really handy as it walks you through what each number means. Can compare against cash (or loan, can change the setting)

    • matchhead124 on 24/02/2020 - 16:34

      Thanks, I'll check it out.

  • BOGOF on 24/02/2020 - 16:32
    +3

    A well written previous post should help………..
    https://www.ozbargain.com.au/node/397243

  • Shadowsfury on 24/02/2020 - 17:00
    +3

    I went down the NL route a few years back.

    Yes I was ahead but in the end by not as much as I was initially expecting.

    Check what your implied interest rate is on the NL

    This loophole is now closed, but my superannuation payments were reduced by my employer because technically my income dropped due to the NL.

    I was stuck with using their insurer and I was getting reamed on insurance costs each year. Not allowed to pick my own (employer requirement).

    Ensure you remove any insurances they try to tack on if you don't need them - I removed things like redundancy insurance, wheel insurance etc which dropped the cost a huge amount.

  • Porker on 24/02/2020 - 17:16
    +1

    I've had a 4 lease cars over the past 12 years or so.

    This response isn't about financials, but to highlight the small perks of at least my lease experience:

    • I don't have to worry about paperwork and/or keep track of the multiple car payments and if charges are correct. This is only a first world problem, but I've had experiences of being invoiced higher amounts to wait to talk to VicRoads or insurance to have corrected.

    • I get to change cars every 3 years!!

    • I'm not having to constantly watch fuel prices. Generally, the lease payment will adjust if there's a big and long-lasting change in the fuel price, but generally fluctuations (with my lease provider) are absorbed. But at the same time, my current Kia Sportage is diesel and that's been fairly consistent.

  • Plug on 24/02/2020 - 17:17

    How did you work out your tax savings? Did you take the NL in order to drop a tax bracket or did you remain in the same tax band?

    Also I've never understood the benefits of leasing a car as you don't own it. At the end of the lease you are left with nothing. What is the benefit to that?

    • gotcha on 24/02/2020 - 17:31

      Depends on the cars you get. You might end up making some profits at end of lease if your choice of cars hold their value well.

  • Muzeeb on 24/02/2020 - 17:23
    +1

    CTP/Rego cost I currently pay (I won’t pay as now its included in NL quote) (120 x 36) ($2,376)

    Ummm 120x36 =$4320

    What am I missing here?

    This

    • matchhead124 on 24/02/2020 - 20:24

      Sorry its meant to say 66 x 36. Which is approx what i pay per month now

  • mskeggs on 24/02/2020 - 17:50
    +5

    You have to spend tens of thousands of dollars on a depreciating asset.
    If you are forced to buy one, the particular finance arrangements might be better one way or another, but consider buying a $5000 car and pocketing the difference.

  • shizzle on 24/02/2020 - 21:54
    +2

    Are you sure they aren't fortnightly pre tax payments? Mine are slightly higher than that per fortnight on a 60 month lease for a $65k vehicle.

    I've found the initial paperwork is deliberately confusing and biased from pretty much all of the NL companies I've dealt with. Couple of things to note

    • The Lease company charge the interest upfront, if you terminate a lease early, you will still pay the full interest amount.
    • I was surprised to have to pay GST on the residual on my first lease, not sure you have factored that in?
    • Taxable income reduction can be useful for things like childcare income testing, this is the biggest benefit for me.

    I won't be getting another lease after this one

    • spackbace on 24/02/2020 - 22:15

      I've found the initial paperwork is deliberately confusing and biased from pretty much all of the NL companies I've dealt with.

      Yep, and many conveniently hide the interest rate, with some charging >10%

      That's why I linked to the Toyota calculator. Every figure has the meaning spelled out to you, so you know what they all mean. People think the FBT value of the car is what they're paying (ooh look at the discount off retail that I get!), but it's not the case.

    • matchhead124 on 24/02/2020 - 23:04

      Yeah. They are monthly payments. I did remove all the extras like window tint, paint protection, lease guard etc though whivh reduced my quote significantly

  • JFFTech on 25/02/2020 - 00:16

    I have been discussing with couple of novated lease companies for my new car purchase. I cannot afford to purchase outright and therefore it has to be either via normal finance or via novated lease.

    After a lot of comparisons, I found NL attractive due to below reasons:

    • The interest rate offered to me was much lower than normal car loan finance (3.89% NL vs 5.99% normal car loan)
    • Upfront GST savings of around 4k
    • Tax savings of ~300/month
    • NL company was able to offer 2k extra discount on the car compared to my own negotiation with car dealers

    The main disadvantage comes when we try to short close the lease. I have heard horror stories of people wanting to short close the lease in one or two years but they ended up with a big disadvantage (of paying upfront the remaining monthly payments + residual + lost tax advantage).

    So, NL comes with a risk but the reward is good if one manages to complete the lease tenure.

    • spackbace on 25/02/2020 - 01:59
      +1

      Positive you've got a $2k discount, and you're not looking at "fbt value"?

      And first time I've heard of a NL having low interest

      • JFFTech on 26/02/2020 - 23:54

        Valid point on FBT value. Since my business usage of the car will be high, it seems my FBT value is going to be low. I will recheck it with my NL.

        Regarding the interest rate, the normal car finance is based on credit rating and therefore the percentage seems to be high.

        • spackbace on 27/02/2020 - 00:14
          +1

          Fbt value is the value of the car, minus ctp, stamp duty and licensing costs

          Nothing to do with your business usage.

          Just had a customer buy off me tonight because I was able to do a sharper price on a RAV4 Cruiser Hybrid than her NL company got

          • JFFTech on 27/02/2020 - 00:33

            @spackbace: Thanks for the clarification. I just checked my quote and see that FBT value is ~1000 more than the final discounted price of the vehicle. Does this sound reasonable? It looks like the 2k discount that I got is now reduced to 1k. Is that correct?

            I wish you are in VIC. I could have come running to meet you - both to say hi to the senior ozbargainer and to ask for matching my NL quote :). By any chance, was your price under $44k for Cruiser Hybrid?

            • spackbace on 27/02/2020 - 00:43
              +1

              @JFFTech: Nope it wasn't lol but our stamp duty is higher than yours. We'd never sell one for that, not worth it tbh

              Take the FBT value, add stamp duty, licensing and ctp to get the actual drive away price you're paying. Those costs would be over $1k

              You'll likely find you're not getting the discount you think you're getting

              • JFFTech on 27/02/2020 - 00:50

                @spackbace: Thank you, I can now go to bed peacefully lol.

    • [Deactivated] on 25/02/2020 - 08:09

      Agree with Spackbace - be wary of the interest rate. You may find they have an upfront establishment fee buried in the detail, or have higher monthly management fees.

      Don’t forget the GST saving on upfront purchase is reduced by GST on residual you pay at the end of the lease.

      I’d also suggest if you went in to a dealership with the NL quote and committed to buy at that price they’d be able to match it then, or if not then a couple days later.

      Also - are those novated lease companies already setup with your employer? Novated leases are a PITA to establish from employer side, you could be wasting your time unless they already have approved providers in place.

      • JFFTech on 26/02/2020 - 23:59
        +1

        Thanks for the point on GST on residual. I wasn't aware of that.

        Regarding the price match based on my NL quote, I did try that but bcoz I'm after RAV4 Hybrid, the dealers were not ready to reduce the price which is understandable.

        You're right, I'm working with the NL company that my employer has tie-up with. I also spoke to another NL just to compare their terms and conditions.

  • wannagrababargain on 25/02/2020 - 10:48
    +2

    If you decide to buy out the car at the end for the residual you have to pay 10% GST on that, usually that's not stated in the quote. Is this included in your $15,888 figure? If not, that could take $1,588 out of your calculation.

    I am not sure that I follow the calculations. The novated lease quote is $1180 pm, usually this is given as two numbers - as a pre-tax and post-tax component. The 'tax savings' of $4800 per year seem a bit too high to me.

    You need to work out what the impact to your net salary (ie take home pay) is. You can work that out with this, assuming no other salary sacrificing arrangements currently:

    A = Current GROSS Monthly Taxable Salary (does not include SGC)

    x = Pre-Tax Novated Lease monthly deduction, from the quote
    y = Post-Tax Novated Lease monthly deduction, from the quote

    A-x = New Gross Monthly Taxable Salary

    T = Tax Witheld -> Work out by plugging (A-x) into https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=TW…

    New Net Salary = (A-x) - T - y

    Difference between Current Net Salary and New Net Salary is the net impact. Once you are comparing everything in 'post tax' terms then you know where you stand.

  • John Kimble on 25/02/2020 - 16:39

    This might not help the OP and I'm speaking in very broad/general terms, but my 2 cents is that someone is paying for it, it is likely the end consumer. The novated lease company has to make money (and they do). Employers wouldn't offer it if it didn't benefit them in one way or another.

    Simplistically, if it was cheaper to do a novated lease for most people, then most people would be doing them (I know it might not be possible anyway if your employer doesn't offer it).

    But I think there is a very small percentage of cases/situations where one would come out massively on top.

    Personally I have a 60 month lease and I can see things like admin fees and management fees eating into my supposed savings.

    Also I personally didn't think/consider about having to pay GST on the residual, but that is my error.

    • gotcha on 11/03/2020 - 21:41

      With FBT rate at 20% of ORIGINAL purchase price, over the 60 month lease period you would have to pay 100% of purchase price with your post tax income. I dont think you would come on top at the end of lease.

      Let's assume vehicle depreciation rate of 20% per year:
      Year 1: Car value $50000, pay FBT $10000
      Year 2: Car value $40000, pay FBT $10000
      Year 3: Car value $32000, pay FBT $10000
      Year 4: Car value $25600, pay FBT $10000
      Year 5: Car value $20480, pay FBT $10000

      I definitely would not want to pay $10000 FBT per year from Year 4, let alone Year 5.

      Personally I found the sweet spot is 2 year lease for tax benefits.

      • [Deactivated] on 11/03/2020 - 23:36
        +1

        You don’t technically pay a cent of FBT. You need to make post tax contributions to the operating costs of the vehicle equal to the taxable value ie $10k, to make employer FBT payable nil. Anything beyond this is a pre tax contribution which is where the tax savings can come in.

        Secondly there is a 1/3 reduction in base value after four full FBT years under stat method but agree you really don’t want to be holding this long. Depends on the provider but generally 3 odd years is the sweet spot.

        Thirdly that 20% isn’t a depreciation rate, it’s the statutory percentage for valuing car fringe benefits under stat formula method. Years back that rate used to change depending on kms travelled (the assumption being high kms meant more business use).

  • AshB on 18/03/2020 - 22:30

    I still dont understand why pepole think they can save gst on car price. True the leased amount is exclusive gst, but monthly lease payments are gst inclusive and they take that amount as a post tax deduction. And you pay gst for the residual value at the end of the term. So where is this gst saving..?

    I know there will be a saving on gst for running cost..but thats not significant..

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