Is Novated Leasing Right for Me?

rakkihizoku on 29/03/2023 - 11:39
Last edited 29/03/2023 - 12:10

Hi Ozbargain,

I thought i'd get the collective opinions here and validate my thought process.

Currently earning 130k and looking to purchase a new ICE car for $34k. Driving roughly 10,000 kms per year.
We got quoted on a 24 month NL which would impact our pay at $963.75 p/m and have an estimated 8.3k in savings over the lease.

Looking to own the car afterwards so we'll need to pay off $19.4k in residual value.

We are tossing up between either going with the NL or paying off the car using our offset accounts.
Have enough in the savings to pay it off but it would just mean 34k goes into a depreciating asset. Whereas on the other hand if we go with the NL then we'd be paying 10k more over the lease period.

Let me know your thoughts or if you need more information.

Financial Novated Lease

Comments

  • BewareOfThe Dog on 29/03/2023 - 11:55
    +1

    Yes. Only because you are paying a heap of tax.
    It's a struggle on $40k.

    • rakkihizoku on 29/03/2023 - 13:52

      Yeah we thought just an average car to get us from A-B but doesn't seem to impact us that much

    • HeWhoKnows on 31/03/2023 - 15:38

      IMPORTANT
      This is a matter that should be discussed with none other than YOUR ACCOUNTANT as it involves your personal financial and tax situation

  • djkelly69 on 29/03/2023 - 12:00
    +1

    Are you aware of the significant (additional) benefits doing a NL for an EV or PHEV at the moment? Not that there is any within cooee of $34k that I am aware of, but you might end up paying a similar amount and getting a more expensive car.

    Aside from that, I don't think there is a huge benefit for an ICE car NL at the moment and would prob just use the offset cash in your circumstance.

  • rakkihizoku on 29/03/2023 - 12:03
    +1

    Thanks for your responses so far! Don't really believe in spending beyond our means for a fancier/more expensive car.
    Also across EV/PHEV and the benefit it has on FBT, the increased costs and wait time (approx 1 - 2 years) vs June/July for a ICE car

    • JDMcarfan on 29/03/2023 - 14:46
      +1

      can i ask what car you are getting for 34k.
      Some of the cheaper EV/PHEV alternatives are close to the 50k mark, so it may be genuinely cheaper (esp for PHEV's) whilst keeping the convenience of a ICE

  • Frayin on 29/03/2023 - 12:04
    +8

    Driving roughly 10kms per year.

    Why don't you just walk! At around 800m travelled a month, or 200m a week, i think it would be very doable!

    Jokes aside, i agree with djkelly's sentiment, worth looking into further.

    • rakkihizoku on 29/03/2023 - 12:10

      Haha! Gotta arrive in style!

  • jv on 29/03/2023 - 12:33
    +4

    Have enough in the savings to pay it off but it would just mean 34k goes into a depreciating asset.

    Better than paying higher interest rates on a depreciating asset.

    • ddilrat on 29/03/2023 - 23:20
      +4

      Exactly right. Don't be fooled by their bogus quote apparently saving you money. Whether it's better or not all comes back to their underlying interest rate. I had to ask many times for them to finally give me the number…

  • spackbace on 29/03/2023 - 12:36

    Checked that the interest rate is competitive?

    Handy calculator here

    • rakkihizoku on 29/03/2023 - 12:43

      Think they told me 9-9.5% they were a bit sneaky on it and didn't put it in the quote. Is that something you can negotiate?

      • spackbace on 29/03/2023 - 12:44

        Depends on circumstances but yes I believe you can

        It's where the NL companies make a good chunk of their money, they're not forthcoming with interest rates so you'll find it's higher than normal

  • netjock on 29/03/2023 - 12:46

    Have enough in the savings to pay it off but it would just mean 34k goes into a depreciating asset. Whereas on the other hand if we go with the NL then we'd be paying 10k more over the lease period.

    You might think about how this makes sense.

    It is two ways to pay for a depreciating asset.

    $42k over 2 years if you do NL + buy out the car. Which is 8k over 2 years. Might be worthwhile for $4k a year because insurance and rego is $2k and $2k for fuel and maintenance? You need to look at the detail, that is where you get caught.

  • Duckie2hh on 29/03/2023 - 12:53
    +4

    I have never seen an instance where NL is more beneficial.

    • ddilrat on 29/03/2023 - 23:21

      I worked it all out a few years back and it was only ever beneficial if you had no option of purchasing with cash and had no choice but to go ordinary finance or NL

      • The Hawk on 30/03/2023 - 08:43

        This^
        If you need to borrow and the interest rates are comparable you come out in front because of the tax benefits.
        If you can ever afford to pay cash it’s the better option.

        Coming out of your offset is the next best as long as you pay back the equivalent over the ‘car loan’ term (otherwise the offset loss is compounded over the mortgage life and might cost you more).
        Next best would be upping the mortgage for the lower interest rate, again only if you plough payments back in to cover the car payments over the ‘car loan’ term.

  • Drakesy on 29/03/2023 - 12:56
    +1

    You're about on par with the break even for novated leases, any lower and you would be better off paying cash.

    The novated lease "savings" are largely based on inflated interest rates and really is a way for companies to siphon off tax dollars from the government into theirs. Their interest rates are notoriously hard to obtain as they keep these close to their chest (generally they're terrible).

    When i did the maths ($150k a year) it was marginally better to novated lease it as opposed to financing it. Mind you they still were pricing an EV mechanical costs and fuel costs as equivalent to ICE which i thought was a laugh.

  • Aussiebargainer on 29/03/2023 - 13:33
    +1

    I'm currently paying $2,200 per month for my novated lease at 8.99% interest.

    They aren't so forthcoming with the interest rate but instead show you the tax savings you get.

    Personally, I am looking at selling the vehicle and just buying with the equity in my home. Would probably work out cheaper even after all the tax savings

    • jv on 29/03/2023 - 23:57

      They aren't so forthcoming with the interest rate but instead show you the tax savings you get.

      You should ask yourself, "I wonder why they would do that?"

  • FoxJump on 29/03/2023 - 13:40

    You say "we"
    If you and your partner can both NV cars, you may be able to NV 1 year with you and then 'sell' it to your partner for the second year and then they can NV lease it for 1 year.
    you need to do the maths carefully, but this can work out much better.

    This only really is worth it for the first two years of the car.
    this way, your (together) residual after two years 65% for you, and then 65% for them .. so .. 43%

    • rakkihizoku on 29/03/2023 - 13:55

      Never thought about this approach!
      I imagine the fees to establish the lease would outweigh the costs and savings.

      Can you also NL a car that isn't in your name though?

      TBH i get a bit lost in the numbers, unsure where the 65% and 43% come from.

      • FoxJump on 29/03/2023 - 14:48
        +2

        With a 1yr NVL, your residual is 65.35%. If an ICE car, then you pay 20% off the 'purchase price' of the car per year, after tax.
        If your ICE car is 100k (simple numbers, i think excluding rego, gst, and other bits), then each year you have to pay 20% [$20000] off that post tax.
        All other expenses come out pre-tax.
        So, you residual would be: $65630 + gst.

        Your partner gets a NVL with your car. Their purchase price is $65630 (no gst payable cos their NVL "buys" the car from your NVL provider). They pay 20% of that post tax ($13126) and everything else pre tax.. Their residual becomes $43073

        You (plural) buy the car for $43073+gst

        And you milk it as much as possible.

        Owner 1: easy process
        Owner 2: They'll need a 'notice of purchase' that owner 1 provides selling they sell the car to owner 2 for residual amount + gst. They'll also need a note from NVL 1 finance company saying the amount payable with owner 2's name. or something like that. NVL 2 company will ask what they need.

        In my case, i never actually moved the rego from me to spouse. NVL2 didnt bother checking. Also, in NSW its stamp-duty-free to transfer car rego between spouses anyway.

        i even tried moving it back from spouse back to me afterwards, since i had changed jobs and could do the trick again; but paper work couldnt move fast enough and set up fees made the benefit to be $1500 over the year only. So we didnt do a third round. Which was lucky, since Covid hit and we didnt go anywhere so the actual fuel expenses would have been tiny.

        The benefit is:
        - reducing the posttax component for year two
        - maxing out the 1year residual so that you pay off more principal.

        With an EV, there is no post tax component, so only the second benefit applies. But, depending how silly an NVL provider is, you could re-sign for another 1yr NVL with the same company and owner and they may apply the 1 year NVL residual again.

        ie:
        a 2yr NVL has residual of 56%
        a 1Yr NVL has residual of 65%

        Extending a 1yr NVL into a second year /should/ mean that your residual is adjusted so that overall after the second year you have still to pay 56%
        but some companies are stupid, and they do things wrong, and they incorrectly apply 2x 1yr residuals of 65% and then 65% of that. But doing the owner swap guarantees that occurs.

  • FoxJump on 29/03/2023 - 13:42

    If your NVL starts in June, and is only 1yr long, then the unspent budget amounts will be returned to you possibly in the July pay the year later.
    Which means you could overprovision expenses during your lease and get them paid back the following financial year.
    Handy if your kids are in their last year of childcare and you want to lower your income so that you get more govt subisdy; and then have that come back in when you no longer need childcare. (assuming they stop attending in June the following year)
    Or if you want to boost your income for getting a bigger loan purposes

    • OL123 on 30/03/2023 - 14:16

      The NVL is not reported to Centrelink on the payment summary?

      • FoxJump on 30/03/2023 - 21:16

        tbh i cant remember.

      • kawinuyo on 31/03/2023 - 02:29

        Novated leases don't benefit you in terms of the childcare subsidy calculations as it is considered a fringe benefit (unless you're in one of the exempt sectors) . So still within your taxable income for centreline purposes. Link is here under reportable fringe benefits https://www.servicesaustralia.gov.au/what-adjusted-taxable-i…

  • applejack on 29/03/2023 - 13:44

    As an aside I found this AMA to be really informative about NL https://www.reddit.com/r/AusFinance/comments/100j03y/novated…

    • rakkihizoku on 29/03/2023 - 13:56

      Yeah this is what started it for me (lots of night time reading last night and even spoke to the OP of that post)

      • kawinuyo on 29/03/2023 - 20:38

        In regards to that post I asked our novated lease people about the 13 month vs 12 month hack. They're not suppose to do it that way and it's being dodgy because there is a specific calculation per month of lease. We ended up doing 1 year.

  • Donaldhump on 29/03/2023 - 14:13
    +1

    NL are good until you lose your job and don't get another one.

    I just don't think its worth it.

    want to save tax put some in your super, your older you will thank yourself

    • FoxJump on 29/03/2023 - 14:53
      +1

      If you do a 1yr NVL only, your losses are limited. I calculated a while ago that in my particular case, if i had managed to remain employed for 3months or so, then after that i could be made redundant and i would be no worse off.

      doing multi year NVL is risky business due to the pain of losing your job, as you pay up the interest for the whole remaining period

  • brendanm on 29/03/2023 - 14:34

    Do an ev, no fringe benefits tax.

  • seannami on 29/03/2023 - 15:01

    I wouldn't novated lease an ICE car, the inability to go full salary sacrifice honestly makes it no better than a loan- I'm on an NVL for an EV and wouldn't have touched it with a barge pole (the NVL, not the car to avoid the samrtalecs) if it weren't for FBT exemption

  • filmer on 29/03/2023 - 16:14

    Novated leases are really only great if your occupation has some FBT exemption, otherwise, they're not really any better than using funds you have on your redraw etc.

    • kawinuyo on 29/03/2023 - 21:16

      They're still okay if you have highish pay and do it for the least amount of time as the savings are highest then and not dilated over the years (so we did 2 yesr). It's not as much savings as they like to tout but hey this is a bargain website right! Ours said we'd save like 8k…i did the sums and we really only save 2k as really the novated lease place takes the other 6k benefit…we do also save on interest not taking the cash out of our offset, so all in all the saving ended up being about 3.5-4k. Which is no small sum to scoff at!

      • filmer on 30/03/2023 - 09:39

        When I ran the numbers doing a cashout refinance was cheaper than novated leasing. People see the tax benefit and ignore how much more they are actually paying.

        • kawinuyo on 31/03/2023 - 02:06

          It depends on your calculations which is why everyone has to do their own. They claimed a tax benefit was 8k and it was in terms of how much less the tax man takes from us. But after factoring into the actual cost of the novated lease I only come out on top 2k (aka the other 6k has gone to the novated lease company and higher interest loan). However add in the interest I save by having the money in my offset takes it up to 4kish approx. You have to calculate cost of novated lease per month x however many months your term is + the residual sum vs cost of outright car + petrol per year + 2 x CTP insurance (pay for next years within the last month of your novated lease) + service + rego + interest saved on mortgage

          Edit: spelling error

  • Some Guy on 30/03/2023 - 00:10

    I looked into a NL on a $60k car a few years ago, on a $130k salary. My company only had one company to use. Everything in the quote was inflated hella-exxy and it also included GST on the car. It would have reduced my takehome by $450-ish a week and as far as I could tell the only saving would be less tax meaning a fat refund at the end of the year.

    My accountant said don't touch the NL and pay cash. So I did that (out of the offset) which enabled me to negotiate a better purchase price and I maxed out super payments and pumped as much back into the offset as possible.

  • PeterSnoot on 30/03/2023 - 08:25

    Are there any good references for the details about how novated leases work including tax benefits, charges and fees please? I'm not considering one but would like to understand them better.

  • ColtNoir on 30/03/2023 - 08:54

    I think you might need to do some more mathing to see if it’s worth it for you.

    What’s the interest rate on the car?
    Monthly fees?
    What novated lease company?
    Are you organising your own insurance vs theirs, or does your company have a novated lease insurance package option? (My last company did so this really tipped the balance.)

    When comparing outright vs NL $ values make sure to also calculate all running expenses for your outright cost, $10k more expensive for NL seems off, especially when you factor in the stamp duty concessions for NL.

    My current NL had a comparison rate of 3.4% and $60/month insurance through work with a $500 excess, and Mazda corporate select which was the first 3-4 years of servicing free. Have a look to see if your employer has other deals with NL that could sweeten the deal. Cash might end up winning but can’t hurt to research more. Maybe also look into a 1 year lease just to get the stamp duty concession and then cash for the residual.

  • apple2016 on 30/03/2023 - 10:18

    $963.75 X 24 = 23,130
    Residual = $19.4k
    Total to own the car outright after 2 years = $42,530
    Or
    Initial $34k + insurance (2 years) +rego (1 year) + fuel (2 years) + maintainance

    I think you might be better off without the NL.

    • kawinuyo on 31/03/2023 - 02:23

      Have to factor in the taxable income reduction because some of the payment in the $42530 is made pre tax dollars.

      Need to see how much tax you pay with a novated lease and how much you pay without a novated lease. So yes the novated lease might cost you $43k whereas buying outright might cost you $34k + (let's say $3k minimum for insurance rego and fuel and maintanence). But a novated lease puts $8k ( back into your pocket from the tax man. That then makes the calculation $35k vs $37k bringing you out on top with the novated lease. Then factor in thr opportunity cost of not using up a lump sum of cash in one go as well.

      I have to say, when I was doing our sums doing a 1 year lease was better for all the cars I was looking at. ($38-50k range)

      • apple2016 on 06/04/2023 - 13:00

        OP stated impact to salary is $963. so I would say this amount is after the tax savings.

        But a novated lease puts $8k ( back into your pocket from the tax man.

        $8k - unless you are buying a EV, you need to factor in FBT

        • kawinuyo on 06/04/2023 - 23:39

          It's already calculated in the impact to salary per month. Some of that is pre tax and some is post tax. As in the 900 amount includes a portion that is post tax payment so you don't have a fringe tax at the end.

  • 82norm on 30/03/2023 - 12:51

    NL is just one big scam. If the final savings is not black and white with grey all over, what does it really say? Who wants to calculate yearly savings, worry about paying the residual and all the malacca in between. If you’ve got the cash, thru offset or otherwise, just use the KISS principle and by the car outright and enjoy it.

    Yes, this may appear to be an ignorant and arrogant response, but just the shear research and variables to calculate potential savings, I just can’t see how it stacks up.

    • Hearthstone on 30/03/2023 - 14:42

      it all depend on each person circumstances, for some NL offer benefits for other it does not
      you just have to run your own number and what you intend to do with the spare cash

  • rakkihizoku on 30/03/2023 - 13:13
    +1

    Really appreciate everyone's insight and feedback! I'm sure there circumstances where NL is beneficial (expensive car, drive a lot, purchasing an EV).
    However for our situation doesn't seem the case!

  • Hearthstone on 30/03/2023 - 14:39

    NL is definitely better if you on a high tax bracket

    I did the number when I did my NL, save me roughly 3-4K a year after tax compared to use cash
    depending on how active you are with your investment, you can also put that cash to work on another properties or shares

    general rule if you are on high tax bracket you can't do worth than cash with NL, either slightly better or break even

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