Calculating Benefits of Novated Lease

Bmann999 on 12/05/2021 - 12:50

I am considering a novated lease for the first time. My rationale is that I am in the highest marginal tax bracket of 46.5% and effectively its over 50% because my income also reduces my childcare subsidy. I don't urgently need a new car and I don't travel too many k's (maybe 15k per year) but I would consider it if the savings are substantial.

Most sources on Novated Leases come from the leasing companies and I really don't trust them at all.
No one really walks through the calculation - they just like to spruik how much savings you make. Most of the examples they use involve people with lower salaries which makes me extra skeptical of the benefits.

I am looking to buy a roughly $60k car and don't actually need finance, I am just trying to save on tax.
Does anyone have a good objective source for working through the calculation and tax implications?

Some of the main things I am unsure of:
Do I get to negotiate the price of the car as I normally would? Removing GST from the cost of a car saves about 9%, but I can probably get at least a 10% discount by calling a few dealerships at the end of the month.

Can I negotiate a competitive interest rate? I see a lot of 7% or 8% rate quoted, when I got just redraw from my homeloan at under 3%.

Can I just package the car? Add ons like insurance are probably going to be heavily marked up.

Automotive

Comments

  • 87percent on 12/05/2021 - 13:13
    +1

    just something to consider.. with international travel, highly likely you'll drive interstate/intrastate more (so your km's MIGHT be off)

    • Bmann999 on 12/05/2021 - 13:16

      Good call - there is a drop off in FBT if I can drive more than 15k in a year.

      • avoidfullprice on 12/05/2021 - 13:47
        +3

        Flat 20% regardless of K driven, unless they changed it at budget last night?

        • Bmann999 on 12/05/2021 - 13:54

          I think I might have been looking at an out of date document. I think it used to be lower for high K's.

          • trex on 12/05/2021 - 14:57

            @Bmann999: Yes, mileage was gradually changed from 2011-2014. Read more here.

          • Muzeeb on 12/05/2021 - 16:58

            @Bmann999: These were the good old days…

            Less than 14,999km 26%

            15,000 to 24,999km 20%

            25,000 to 39,999km 11%

            Over 40,000km 7%

  • uncompressed on 12/05/2021 - 13:18
    +1

    Yes, you can negotiate the price. Some dealers have deals with fleet companies and you do get a better price as well. In one instance, I got the car at the price I wanted, then got finance through a novated lease company. Another time, I mentioned which novated lease company I was using and instantly got a much better price without having to do the song and dance with the sales guy.

    Yes, you can try and negotiate with a more competitive rate.

    You can also package the car with the insurer of your choice.

  • Muzeeb on 12/05/2021 - 13:41
    +5

    Novated leases have become a PITA over the years. I've had 5 in the past but my last vehicle purchase I just purchased outright. My main reason was because Julia Gillard removed the very advantageous FBT sliding scale. I travel more than 40k km's per year.

    Times were good pre Gillard and when my employer actually had their own salary sacrifice department. Now the FBT rates are shite and the outsourcing is just lining the pockets of the novated lease providers instead of your own.

    My maths showed that it worked out to the equivalent of an interest free loan on a new car.

    If you don't need a new car and you're only doing it to reduce your tax liability then it's not worth it.

    YMMV.

    • Bmann999 on 12/05/2021 - 14:00

      Thanks - I don't need a new car, but I do have an older but reliable car that could do for a change. I also also at risk at going over $353K family income this year which would mean my childcare subsidy could go from 20% to 0% (this is a potential hit of a few thousand).

      • Muzeeb on 12/05/2021 - 14:10
        +10

        I also also at risk at going over $353K family income

        Which hospital are you a nurse at?

        • Drakesy on 12/05/2021 - 15:53

          Never forget

        • aranciata-oz on 13/05/2021 - 08:58

          As if the hospital matters :-)

      • onetwothreefour on 12/05/2021 - 14:38
        +8

        this is a potential hit of a few thousand

        I'm sure you'll survive.

      • snooksy on 13/05/2021 - 08:22
        +10

        Do you really need a childcare subsidy earning so much? Should other workers be paying taxes for your kids to attend child care?

    • Ouroboros on 18/06/2021 - 11:23

      Wow, 40k kms per year?? Wouldn't the tax and GST savings be astronomical? Im doing half that and my lease turned out better than paying cash?

      • Muzeeb on 18/06/2021 - 11:58
        -1

        Not anymore thanks to Gillard

        • Desertdweller on 18/06/2021 - 15:05

          Thats still a lot of pre-taxed income and GST savings with all that running costs. Surprised it didn't work out better than paying cash, did with mine and I drive half the amount you do.

  • Dumax on 12/05/2021 - 13:54
    +4

    OP, whilst you "save" GST on the purchase price - you actually pay GST on the lease payments (i.e. the financer passes the cost on to you) and therefore pay more GST in the end (purchase price + interest). The same thing happens with the residual value (if you don't rollover) as the GST that you "saved" will be added back when you pay it out at the end of the lease. The savings for the car will be the difference between your marginal tax rate and the increased document fees/finance costs - typically the savings in this regard are fairly negligble (especially when compared to a cash purchase).

    The real savings are in the running costs. However, an important thing to remember is that most companies focus on how much you "save" from your pay packet - but this creates a perverse incentive to inflate costs, which in turn increases your "savings".

    In relation to sourcing your own car/finance, the dirty secret of the Novated Lease industry is that they are running two different businesses at the same time (decent summary from Maxxia):

    • Payment Management (self-managed lease) - this is simply managing the administration of payments from your salary. You find the car, source finance, do all paperwork, budgeting for running costs and claiming back for runnings costs.
    • Lease Management (fully maintained) - this is all the "conveniences" (upselling) that really make these companies the money.

    Obviously they're not very forthcoming with the differences and will often conflate both of these roles! This is because the former makes them very little over the life of the lease (e.g. depending on the agreement but I've seen plenty <$30 per year) but the latter is significantly more lucrative once they add their management fees and the incentives/kickbacks they receive from the companies that they sign you up with.

    • am0522 on 28/06/2021 - 08:10

      Are you sure about GST on lease payments? Isnt GST on lease payments claimed by the employer and not passed on to the employee?

  • Bmann999 on 12/05/2021 - 14:25

    So is the right calc to work out the benefit = Margin tax rateannual lease cost - * 20% of car value FBT rate ?

  • tsunamisurfer on 12/05/2021 - 14:47

    I considered this for my Q5.

    I had the money saved so was going to buy outright.

    I did the sums with NL and the financing aspect kills almost all savings.

    Lending money you have just to claim it back as a deduction does not work out at all.

    • Bmann999 on 12/05/2021 - 14:51

      So the 'savings' is that the interest of the loan becomes deductible? That makes sense how a novated lease can save money compared to a traditional auto loan… but an 8% interest rate is still a waste of money if you have the cash, even if you can deduct the interest.

  • holisticboy on 12/05/2021 - 15:52
    +1

    I recently did a novated lease with intention to purchase the car at the end of the lease.

    For me, I just flat out calculated costs for both a car loan vs the novated lease. While the car loan beat the novated lease for the car itself, the running costs of the car with a car loan couldn't hold a candle to the novated lease (even including the buyout figure at the end). I basically ignored the tax break when comparing both and considered it a bonus, but at the end of the day, the car loan could not even remotely compare to the novated lease. That being said the actual savings per month was not entirely amazing, but at the end of the lease the difference was clear.

    • mskeggs on 12/05/2021 - 21:17

      Do you mean the fuel/maintenance/insurance costs were substantially cheaper via a lease than what you could source yourself?
      I only had a lease once years ago, but the figures then were very average, full RRP type costs.

      • holisticboy on 12/05/2021 - 22:17

        Yeah I went overboard, calculating literal kilometer costs, fuel tank size, average fuel per litre, etc. Additionally, my novated lease came with things like services, tires, etc and they all added up to a lot less than if I had car loaned the same car and purchased those things myself.

  • tissue on 12/05/2021 - 16:17

    Only thing is if your money is in an offset account, its not free money as such.

    Ive had a few leases in the past, but paid cash for the last few vehicles. I found that the cheaper the vehicle (so lower finance) the better, likewise the more expensive the running costs (pretax) the better in comparison to not having the same vehicle on a lease. So it made things like Petrol Ford Territories more likely to stack up (high fuel, tyres, etc) on a lease versus paying cash, but you then get stung by the depreciation potentially being more than the lease allowance.

    The other change now is that the finance cost is a much higher percentage than that redraw/offset percentage. Looking back 10-15 years ago, they were much closer so paying cash out of a redraw/offset was more of a penalty than it is nowdays.

    Comparing to a car loan though it will usually be cheaper to lease than loan. And most of the lease calculators only work on comparison between leasing and a car loan, as it does show the benefit.

  • [Deactivated] on 12/05/2021 - 18:16
    +1

    Forget a novated lease.

    Most sources on Novated Leases come from the leasing companies and I really don't trust them at all.

    That's because they are not trustworthy. And they get mighty unpleasant when you push them for calculations, in particular what interest rate they're charging you.

    At the end of the day, if you have the cash to buy the car, then it works out roughly the same buying it from your after tax savings. And the best part is that your taxes went to helping the country rather than some private company's profit margin on a dodgy loan.

    If you can't buy the car outright then why are you getting a new car in the first place. When it comes to cars (a depreciating asset) only buy what you can afford.

  • [Deactivated] on 13/05/2021 - 01:17

    Done the maths, not worth it to get a novsted leasse due to 1. FBT (main factor) 2. "Admin" cost 3. Cars are not necessarily cheaper despite GST removed 4. Interest on loan.

    Logically speaking, novated lease companies can generate enough to list on the ASX. Numbers are not adding up on the claimed "savings" vs able to run a very profitable business.

    If you have a family trust, buy the car with the investment company, rent the car to yourself at "market rate", the buy the car at depreciated rate at the end of year 3.

    • aranciata-oz on 13/05/2021 - 12:19
      +1

      I've investigated this novated lease many times now, including having experienced one myself almost 13 years ago (with the FBT sliding scale). Fast forward to now - the very fact I had to ask my novated lease quote manager multiple times last year what the actual interest rate they were charging me on the lease (hey they have to borrow the money to buy the car after all!) before finally getting vague over-the-phone (not in writing) rates "that are very competitive and comparable to your home loan!", confirm to me how incredibly astonishing this industry has become so lucrative, based on essentially trying to market loudly to consumers they have access to "deductions" but being very quiet about explaining how you can't get free lunches with the other side of the ledger ie. being stung with FBT and vague (you have to read the fine print of course) interest charges - you don't necessarily see as it's all "packaged" into a monthly cost you pay.

      Having said all that, as we are considering upgrading our car, in this climate where new car discounts at a private level is almost non existent (will possibly change in 6 months when chip supplies resume and car stock increase again), I will be reading all the fine print and doing the sums down to the nth degree on the novated lease quote because the saving of the purchase GST upfront might be worthwhile, including any discounts the novated lease gets from the RRP of the car. But again only if I have confidence my current employment will be at least stable in the time ahead - another thing these companies don't explain to their unsuspecting customers that if the customer needs to break the novated lease because either they become jobless or the new company they're employed at is not prepared to have take on the admin side of the lease, the lease cancellation penalties are HIGH - basically my understanding is this is where the previously shoosh-shoosh interest rates really kick in. And you'll be left ruing the fact it was then probably cheaper just to purchase the car in the first place with the offset money in your home loan at the low interest rates, with no worries about lease terms etc.

      Novated Leases …. caveat emptor, consider your employment prospects and do your sums properly before signing on!

  • LFO on 13/05/2021 - 18:29
    -1

    This might be outdated but the trick was:

    1. Buy a cheap old bomb (roadworthy) so FBT will be minimal.

    2. Repair and replace everything from the old bomb, from engine to fuel tank. Every car expense will be a valid one.

    3. At the end buy-back the old bomb, now with new engine, paint, seats, tires, etc etc etc Then, of course, sell it privately.

    For those with current up-to-date knowledge: is this still the case for this approach?

  • Kraise on 15/05/2021 - 10:50

    I got a Hyundai i30N with NLC for 24 months, the lease includes petrol, rego, insurance, roadside, service, tyre replacements and repairs.

    They gave me two choices, they source a new car for me via their network or I find the car (new or <5 year old second hand).
    I got them to source the car for 40k (ex GST), it was 36k car + 4k luxury pack (leather seats etc).
    I read people were considering 46-48k (inc GST) a good deal at the time but there were one percenters that have bargained down to 43k inc GST.
    my understanding is that NLC have a considerable bargaining power and will consistently outdo 90% of the general population for a better deal so only do it if you are good or confident.

    I pay about $800 pre-tax (for the car) and $600 post-tax income (for petrol etc) which worked out about $1200ish/month out of my take home pay. at the end of the lease, i can buy out for 25k so big picture, I pay almost 55k all up for the car which I think is not worth it.

    Chat with your HR and see who your company is partnered with for novated leasing or if you don't have one, approach a leasing company (NLC is the only one i know unfortunately) then ask them for a quote (free). They'll give you a break down of what you are asking for (pre-tax cost, post tax cost, your budget for petrol etc, and your take home pay), along with the terms and conditions.

    If you are purely thinking about the income taxes, then what about salary sacrifice super contributions?

    • Desertdweller on 18/06/2021 - 15:09

      Yeah better to look at the smaller companies. Positive Salary Packaging, NLC, Eutopia… less overheads, less need to charge higher brokerage.

  • Desertdweller on 18/06/2021 - 14:52

    If you're trying to find out how much the car will cost, compared to paying cash or a loan. Just calculate all the running costs on the estimate they provide (Maintenance: Tyres: Registration & CTP: Comprehensive Insurance: Fuel: Management) and deduct that amount from your out of pocket costs…

    That is the amount you are paying for the car after the income tax and GST savings and fees. Then multiply that amount by x amount of pay cycles and add it to the residual, that is what you will pay for the car. Should be better than paying cash, if not, your leasing provider is probably making too much brokerage.

  • curleytrain on 20/09/2021 - 13:06
    +1

    Well, a very rough calculation but will give you a good idea:

    The full amount on the car I chose was $68,500. Could pay upfront through my offset account but there was some cost associated taking that money away.

    Opted for 2 years lease with fortnightly payments of $720 each.

    Residual value: $39,000

    Now total out of pocket at the end of 2 years = 52*720+39,000 = 76,440

    Estimated expense on fuel/rego/insurance/maintenance etc = 7,500 @ 10,000km/annum

    So would've costed me 68,500 + 7,500 = $76,000 if paid upfront
    Costed me on NL = 76,440

    So, would've saved around $440 if paid out of my offset, but then, considering interest charged at 2.8% on my home loan it's a big win.

    Going with a shorter lease terms is better (if you are in a position of coping large repayments) and 2 years was the sweet spot for me.

    PS: I'm with NLC at 3.6% interest

    • Nuggerz on 31/01/2022 - 01:05

      Am currently looking at NLC and just wondering if you negotiated your interest rate down to the 3.6% and if so, what the original quoted rate was? Have received a quote from NLC @8.27% so am interested to hear your experience. Thanks!

      • curleytrain on 31/01/2022 - 12:50

        Nope, I didn't negotiate. That's what they offered me initially. Maybe it's something to do with your organisation? I work for the govt so maybe there's a discount. However, 8.27% seems to be too high and unrealistic.

        • Nuggerz on 05/02/2022 - 22:10
          +1

          Thanks for confirming; yeh it definitely sounded high! I have the cash to buy outright but have high running costs and would rather keep in offset ideally similar to yourself. Might make an enquiry about the rate. Cheers!

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