Novated Leasing - Any Experts on How Extensions Work?

Grale on 09/06/2020 - 15:25

Hi guys,
Just wondering if anyone has any experience with extending a novated lease contract.
Basically I'm at the end of my 4 year lease and I have the option to pay it out or extend for another year.

Unless my Maths is wrong, it seems like it may be slightly beneficial to keep it going for another year.
However, I'm getting stumped around the ECM and pre/post-tax contributions.

Currently, the portion I'm paying is about 900 for lease rental and 100 for running costs.
I've been told that going forward, the lease rental would drop to 500 but my running costs would be upped to 500.
I'd still be paying $1k but I guess the rate of repaying the car would drop quite a fair bit.

Is this right?

Financial

Comments

  • thatonethere on 09/06/2020 - 15:31

    at the 4 year mark you can reduce the value of the asset - hence lease cost reducing.

    The car may be harder to sell if you say had a 5 year warranty and there is none left after the extension.

    • Grale on 09/06/2020 - 17:44

      On this, it seems like the value is only reduced by 1/3rd from 1st April after the 4th anniversary.
      I read that as basically saying that you missed out if you purchased your vehicle on 31st March.
      Not sure if they would pro-rate this into the calculations.

      Currently, they are still working off the original value of the asset since I haven't hit 1st April (bought in August).

      As for the lease cost reducing, I think it's more around the fact that I have now extended by 1 year and they are playing catch up to get to the RV that they want after 5 years. So rather than paying 700ish (if I was originally on a 5 year lease), I've overpaid and now my last 12 months is drastically reduced.

  • GG57 on 09/06/2020 - 15:48

    Would you still have a residual to pay out at the end of the lease extension?

    • Grale on 09/06/2020 - 17:45

      Yes unfortunately.
      Drops from 19k to 14k.

  • ericb on 09/06/2020 - 16:31

    Extending the lease would mean that you can continue to receive the tax benefit (albeit at a much lower rate as your car has significantly depreciated).

    • Grale on 09/06/2020 - 17:46

      by tax benefit do you mean the pre-tax dollars that I am contributing?
      I'm hoping that the savings from gst, offset account and marginal tax might still be ahead of the costs of extending.
      I did the Maths but can't be sure if i missed anything.

      • ericb on 10/06/2020 - 19:23

        it is, in pretty much most cases, going to be cheaper for you NOT to lease a car if that is an option for you financially. i.e compare the cost of the difference between the interest you pay on your offset account(4%ish) and the interest you pay on your car lease (10%) amount. It is unlikely that the tax saved with your pretax dollars lease is going to out weigh the interest charged by the leasing company. Novated leases are only really financially beneficial if you cant afford the car you want to drive. The more financially beneficial alternative is to go for an 'associate lease', where you pay the lease payments to your spouse or adult child.

  • FoxJump on 09/06/2020 - 18:02

    After four WHOLE FRINGE BENEFIT tax years, the base cost of the car drops by 1/3. That is the amount which controls the post-tax portion that you pay. So if you bought your car just before the fbt year ends/starts then you're off to a good start. Otherwise if you buy it say half way into the FBTY then you'll only get the basecost reduction half way through your last novated lease year. I think they adjust the repayments when that happens.

    NB: You pay 20% of the base-cost of the car each year post-tax, everything else comes out pretax.

  • chillybags on 09/06/2020 - 20:13

    I had a 1 year novated lease extended is by another year. The ballon payment dropped at the end of the lease to what it would have been if i took a two year lease from the start. I also had new repayments in the 2nd year that were significantly less than the first year, don't remember all the maths behind it though.

    • [Deactivated] on 09/06/2020 - 22:11
      +1

      Yep best benefit is from a 1 year lease, each year you extend the benefits reduce, as the depreciation of the vehicle in dollars is less each year. Cost for a 1 year lease is significantly higher in repayments, so if you extend for second year your repayments costs drops dramatically. Upside of a 1 year lease is that you are only commited to the repayments for 12 months rather than 2 years, so I always go with 1 year first, then extend if need be.

      • FoxJump on 10/06/2020 - 08:26

        If at the end of your one year lease you transfer the car to your spouse for her to do a one year novated lease then you get the benefit of two one year novated leases

        • [Deactivated] on 10/06/2020 - 12:24

          To my knowledge there is no benefit in doing this, as the depreciation model just follows the ATO table, based on the age of the vehicle.
          As per the below the largest depreciation is in the first 12 months 34.37%

          Lease term residual values:
          12 months 65.63%
          24 months 56.25%
          36 months 46.88%
          48 months 37.50%
          60 months 28.13%

        • ericb on 10/06/2020 - 19:16

          I'm pretty sure the op can just do two one year leases back to back.

  • [Deactivated] on 09/06/2020 - 22:14

    In regards to running costs increasing for the 5th year this is just an allowance, assumes car is older and require more maintenance, doesn't actually mean you will use it. If you don't use it then you'll be credited back at the end of the term less your normal tax rate.

  • MechEng on 10/06/2020 - 09:34

    You can change your running costs to whatever you want. If you run you car with an allowance of $100 I don't see how it can go up by a factor of 5 in one year. If you want to be safe may be double or triple that $100.
    Also the balloon at the end follows ATO table, so you can just look it up and see what would be under different scenarios.
    So you will pay $500 x 12 = $6,000 for a benefit in the reduction of the balloon of $5,000. Would you recover the $1,000 by any other means? Interest on you home loan, GST, or any other way?

    • Grale on 10/06/2020 - 13:44

      yeah i didn't quite get the increase in running costs.
      My post-tax contribution is fixed at 900, and since my lease rental was dropping significantly, I figured that the only way to cover the post-tax contribution was to up my running costs.

      That being said, does anyone know about the tax treatment when you get a refund?
      Do they do a reconciliation of how much was funded out of pre-tax and post-tax dollars and only tax the pre-tax portion?
      Or is the whole lot taxable?

      • [Deactivated] on 10/06/2020 - 14:21
        +1

        My understanding is that any credits/refund you receive at the end of the contract is taxed at your normal rate. Best idea is to spend it all prior to the end of contract i.e new tyres, next years rego or insurance so you don't receive any refund. Thats what I did previously.

    • Grale on 10/06/2020 - 13:46

      oh and thanks for pointing out how the residual values work.
      i was scratching my head over how they get the %.

  • Desertdweller on 18/06/2021 - 15:13

    my understanding is that if you do plan to keep the car longer than your term, its always better to lease it again. The running costs should be the same, but the 20% ECM drops because the market value of the car has dropped, which basically means the pre to post tax ratio is much better.

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