I am planning to buy a new car $67.5k
Is it cheaper to take a 1 year novated lease with annual payment of $28k? And balloon of $44k
Or using homeloan offset @2% total cost for 1 years term after rego, fuel , insurance , opportunity cost is about $72k.
is this Novated lease through work , as in will it be part of a salary sacrifice program ?
It through work. I think it is salary sacrifice as the annual repayments has both pre and post tax deductions
Fbt? Usually kills off most benefit if not all. Then get hit with interest on finance.
With the novated lease what do you intend to do after the lease?
Roll over with another 1 year lease or pay cash from offset. It really depends which one is cheaper 🤔
Do you need a $70k car?
Pay $30k cash from offset for perfectly good car and invest $40k in appreciating asset.
Maybe he could just spring for a 80k AMG Merc?
Brain says no
Heart says yes
DOnt novated lease. Top up home loan and use that money to buy outright.
But you will be paying the increased home loan off over a longer period……
Yes that's right, but you could also say that the money that is going into the lease will not be going in home loan.
Either way, you could argue that compared with not buying a car, you would be "paying" for it over the life of the home loan.
Not all novated lease deals are created equal. Be sure to ask for the specifics of the lease such as finance rate you will be given within the lease. They will sell it as an amazing tax break but from my experience when you break down all the numbers it isn't that attractive at all.
What is this 67.5k car
Mercedes C200 with AMG pack
LOL
You had me at AMG pack
Is the C for can't afford S class?
No, it is for can't afford E class…
E class is for can't afford S class
Post a break down of the quotes including all fees
These days, novated leases are rarely worth it.
Except if you want the car now and haven’t saved up like you should.
i had a 5yr novated lease quote 2 weeks ago and in face value doesn't appear cheaper than buying outright. There was value though, if you choose your own insurance (~7k pre-tax) since they tucked in a $2,200 annual insurance in the initial quote
Novated leases include finance costs.
it should have been "cheaper than buying via car finance"
I think 1 year is better than 5 years as there are more tax and fringe benefits.
With 1 year I could pre tax 2 years worth of rego and insurance?
I compared 3-year novated lease vs homeloan equity at the start of this year for a $75k vehicle, so can offer pretty good advice.
Short answer is they come out almost the same.
The lease saves you money due to the pre-tax payments, but the fees and finance interest cancel it out.
I went with the lease and am saving about $3k over the 3 years compared with buying it upfront. This saving is entirely because I get to keep the money in my account offsetting the homeloan.
I negotiated a lower interest rate (down .2), and organised my own insurance. I've been told of people negotiating the management fee as well.
Your balloon, car interest rate, insurance and fees will all be different so you need to do the numbers for you. Stick it all in Excel.
what rate did you get them down to?
3.78%
Also removed roadside assist (because the car comes with it already), and removed the carbon offset.
Novated lease fees last time I looked into it, came to the equivalent of 10% on top of the interest rate quoted for finance, over 16% in total.
Put the fees and start up costs into a spreadsheet and you'll probably find most of the tax savings are eaten up this way unfortunately. I went with dealer finance on my last car at 4%. Not bad, not great, but a whole lot better than 16%…
Not that simple/black and white.
Talk to an accountant and/or financial adviser and see if you can work out a better tax benefit method.
Novated lease is still financing - you are still borrowing money but you're paying pre and post tax dollars for it.
They way they calculate the savings for you is that finance rate is hidden on the repayments so you don't see it, i.e. the repayment includes the interest they charge you on the money you borrow. It's very cunning because you can't directly compare them with regular car loan rates or even offset account rates. I did a quick comparison years ago and it boils down to that the "savings" that you made from tax deductions really went to the novated lease company due to the finance charges. You're really marginally better off it than a car loan if not at all.
The general rule is, if you have money now use all of it for your purchase. If you have to "borrow" money, then go for your offset account.
Stay away from Novated leases - there are plenty of better ways to reduce your taxable income e.g. property expenses.
You need to use your specific circumstances and get a serious spreadsheet going. What everyone says here is only conjecture based on their experience.
In my experience lease wasn’t a brilliant idea. It locked me in and meant I had to find a large wad of cash at the end. If circumstances changed, it could cause headaches. But then, I’ve been taught to save them buy (property excepted).
Get what you can afford now. Don’t lock yourself in to a balloon payment you might not have later.
If I have the money for a car now, why would I not still have that money in a couple years (+ interest) for the balloon payment?
Definitely not for everyone though as not everyone is capable of not spending savings.
smart People do that. Have the money now.
Not so smart people take a lease then plan to save up for the balloon. All it takes is a serious illness or accident, major house repairs, change in work circumstances or simply the desire to purchase something different and you don’t have that cash.
I’ve gone through this scenario myself earlier this year. A 1 year lease and then 4 years to pay the balance using offset was financially better for us compared to a 2,3,4 or 5 year lease.
We arranged our own insurances, and fuel, and claim it back with the leasing company. We also negotiated a better deal on the car with the dealership than my leasing company. Yes that is technically their role, but it’s our money that they are spending. We’re mainly using the lease for tax benefits, no gst and fleet pricing, noting the loan repayments in the lease are around 8%.
And yes, you need a serious spreadsheet for the calculations.
The one thing that you have to be careful with Novated Leases or Salary Sacrifice is that it will have an effect on your Taxable Income, if you pay either Child Support or a HELP (Student Loan)…
In which way?
I assume they are added back in for income tests (child support, Medicare levy surcharge) and HELP (Repayment income)
Actually they don't. The literature suggests they do, but reality is different.
My mate and his ex missus both have novated leases purely due to child support balancing. She bought a $60k car first, and his CS payments went through the roof. So he basically went out and did the same, and CS payments normalised back out. Basically a spite lease. Ultimately kids miss out …
What a world ey?
@tunzafun001: So I took a bit more of a look into it - looks like most are done using the ECM method and therefore have no reportable fringe benefit amount - therefore nothing to be added back into the assessment income (for CS or HECS)
Please see this link which explains it https://www.gosalary.com.au/wp-content/uploads/2020/09/gosal…
So novated leases will make you pay higher child support or HELP?
Please see this link which explains it https://www.gosalary.com.au/wp-content/uploads/2020/09/gosal…
Lots of varying advice here because taking a "novated lease" out varies considerably depending on your personal situation, income, tax rate and what you negotiate. In my case I was able to secure an interest rate equivalent to housing finance, fixed management/admin cost that amounts to a coffee a week, pay my own rego and insurance and other costs (claim back) thereby not having to use their high cost ones. So novated lease won hands down after I did the calculations. I got finance at the same as my home loan, but payments against that finance largely before tax and I'm not digging into my equity.
Remember the finance offered on a car loan/novated lease can be negotiated and depending on your credit score/risk/income can be surprising. Also novated leasing is more/less n cost effective depending on your marginal tax rate.
A couple of significant advantages in my experience are managed expenses amortised. Full financial reconciliation. Makes equity available for other income generating purposes.
That being said I highly recommend doing full calculations yourself. I found for years the figures didn't add up for me…. Then they did.
Agree 100%. In a high tax bracket there can be pretty substantial benefits to buying a new car on a 1 year lease; I've done it a couple of times. The 30% depreciation which is standard for a 1 year lease plus the GST benefit and the fact that your running costs are all tax deductible for that year resulted in $4-5k saving in my case vs buying outright, even taking into account a higher interest rate, fees and FBT. You do need to be careful of hidden fees and yes negotiate the rate as I've seen some which are astronomical.
Novated leases are fairly complex. I've done one from start to finish, learnt quite lot and in summary, benefits realised will depend on:
- your salary/tax bracket (higher tax bracket generally means more tax benefit)
- interest rate + fees charged by the novation company compared to say pulling money out of your home loan
- price of car (more expensive car has higher fringe benefits tax which reduces the benefit of the lease arrangement)
- amount of expenses incurred like fuel, maintenance, tyres, car wash, insurance (these are essentially provided GST free and in a lot of case come solely out of pre tax income) - the higher the expenses, the more the benefit
- any discount a novated lease company can get on buying the car for you (eg. They often can get it cheaper than you can negotiate privately with a dealer)
- length of lease as this impacts interest rates and also after a number of years (5 I think), the fringe benefits tax liability per year deceased by a third or so (can't remember exactly). So for example on a 7 year lease, all things remaining equal you get more saving in years 6-7 than years 1-5.
- Risk of breaking the lease if you change employers and still having to pay it off without any of the benefits, as EVERYTHING would come out of your post tax income (remember the novated lease benefits mainly come from using pre tax income)
Hope this helps! But overall best to get a detailed quote and try work the numbers yourself.
As a very rough rule of thumb, if you are doing less than 10,000kms a year and a relatively expensive car (65k+) then it's unlikely to give you much benefit.
All too complicated. Use offset to purchase. Better still, save until you have cash, then buy outright.
So many people crunch numbers on novated leases to assess cost/tax savings and I really do wonder if you do ever come out significantly on top….. I guess people do it as they want to dry a nice fancy car every 4 years.
Have had a few now. My main takeaways (really echoing what others have said) :
Is there a novated lease mechanism where you can set up an offset account (e.g. with the leasing company), similar to home loans? The idea is to avoid the finance fee (~8%) for the lease period, let's say 1 year. This would save 4k on a 50k loan, while still allowing you to maximise pre-tax payments. Better than fixed deposits and stock index investing I guess.
If there was how would the lease company make any money?
Fair point! I guess they wouldn't be a lease company then haha and just manage admin.
I was told by a friend novated is cheaper than using cash? Salary is around 100k