Novated Lease Scam or Savings - My Calculations

apaul on 18/03/2024 - 23:08

I have been thinking purchasing an electric vehicle (EV) and exploring the potential benefits of utilizing novated leasing to take advantage of fringe benefits tax (FBT) savings. To assess the savings , I conducted a thorough calculation based on the purchase of a BYD Atto 3 extended range model. For calculation purposes, I assumed a cash payment of $50,000, inclusive of a $3,000 government rebate for the car.

Under a 5-year novated lease agreement, I would be required to pay $18,000 annually for 5 years, with a residual value of $15,000 at the end of the lease term. Therefore, the total amount paid to the novated lease company over the 5-year period (assuming I decide to purchase the vehicle at the end of the 5th year) would be $18,000 x 5 + $15,000 = $105,000. It's important to note that there is no Goods and Services Tax (GST) applicable on novated leases.

While I would receive tax deductions on the $18,000 annual payments over 5 years, totaling approximately $30,000, deducting this from the total amount paid ($105,000) leaves me with $75,000 as the effective cost for the vehicle.

Factoring in additional expenses such as registration, insurance, Compulsory Third Party (CTP) insurance, electricity, and tire costs, totaling $10,500 over 5 years, the total cost of the vehicle under the novated lease arrangement amounts to $64,500.

Therefore, since there is no GST applicable on novated leases, it becomes apparent that I am effectively purchasing a $45,000 car. This underscores that the novated lease option is not a means of achieving savings, but rather a disadvantageous financial arrangement.

IMO, novated leases revealing it to be a rip-off rather than savings.

or am I missing the huge savings ???

Poll Options Sat, 01/06/2024 - 00:00

  • 297
    Novated lease = rip off
  • 77
    Novated lease = Huge financial benefit
  • 8
    No idea , I trust what leasing company say
Financial Novated Lease

Comments

        • whyisave on 22/03/2024 - 17:53

          I have had Novated Leases before, and I'm currently on a Novated Lease myself, but with an ICE car.

          I don't have much interest in EVs, even though I think the technology is great and something to admire from an engineering point-of-view.

          I always try to think of the TCO (Total Cost of Ownership), and try to work out from the 'end' backwards to the beginning,
          to figure out what a potential sale price could be, and then dividing that over the years that I had the car (ICE or EV).

          From all of everyone's posts in this thread, everyone was talking about pre-tax contributions, post-tax contributions, balloon payments and what not, but at the end you still needed to decide what to do with that car after making all those payments.

          At that point, either you keep the car, trade-in or sell the car, right?

          With ICE cars, you have a historical trove of data, insight and experience that we can all draw upon, to have an opinion about this.
          However, we haven't seen a situation, where there will be a flurry of EV cars in the future,
          all trying to enter a used car market…and if there are any negative news about EVs by then,
          nobody would want to own one…because of <insert some fear here>.

  • UltimateAI on 22/03/2024 - 08:24
    +1

    Not your intention but the question is poorly worded.
    A novated lease or any type of expenditure is NOT savings.
    But compared to purchasing outright can be a lower cost way to secure a vehicle. Note: you don’t own the vehicle until you pay the balloon payment.
    As you are not paying up-front the money can still be working for you in other investments / home loans.

    Too many implications positive and negative to type here

  • PeteM on 22/03/2024 - 10:19

    Yes, novated leases can provide great financial benefits, this depends on your financial situation, the vehicle and your leasing provider.

    Unfortunately, there is a lot of missing data in your post, so no one can tell you whether it is a good deal or not and at first glance your sums comparing purchasing price vs overall leasing costs is incorrect. I also do not understand your statement around there is no GST on novated leases or what you understand that to mean? There most certainly is GST involved in novated leases, however, your employer may be crediting this back to you. You need to understand how this works with your employer to be able to make an informed decision.
    It appears to me you may not be fully informed on how the finances of a novated lease work; it is not one number you are paying for the lease. Yes, a single budgeted amount is withheld from your pay, but this is budgeted amount consisting of running costs and finance repayments. Unspent running costs are returned to you at the end of the lease. There are also many variables that affect the outcome of novated lease calculations which need to be considered.

    You need to provide a detailed breakdown of your lease costs, i.e. the lease budget that the leasing provider is using along with the cost and model of the vehicle if you would like any credible feedback on whether you may benefit from a lease, but again, this is why you are instructed to seek professional financial advice before proceeding with a novated lease.

    But I can't emphasise enough, your leasing provider and finance arrangement are two of the biggest factors that can decide if you will gain any benefit.

  • knk on 22/03/2024 - 10:39
    -4

    I've never seen someone actually sit down and do the math and have one come out on top

    • uncompressed on 22/03/2024 - 11:28
      +2

      It's the opposite for me. I've never seen anyone say it's a scam or a bad deal back it up with maths. It's all blanket statements without the numbers to back it up.

    • shiny1 on 22/03/2024 - 11:40
      +2

      Did you even read the thread? Multiple people including myself have laid out the maths. It's your turn now to prove us wrong.

  • gentlekoala5906 on 22/03/2024 - 17:52
    +1

    I remember hearing once "buy what appreciates, lease what depreciates"

    • whyisave on 22/03/2024 - 17:56
      +1

      There's a little bit more to do this,
      ie.
      the interest rate of the leasing company,
      your income tax bracket,
      the cost & type of car,
      the distance driven (20K - 25K kilometres is a good target), and
      the calculation method of depreciation.

      And don't ask me to explain all these either because I, myself, don't understand this completely,
      but I know some of these 'inputs' to the calculations are necessary to make a judgement of this
      and even then, I won't know how argue these points either !

  • maverickjohn on 22/03/2024 - 18:49

    I always found them to be a rip off. When I got the BMW I used BMW finance and used it for salary packaging. Pretty sure it worked out much much better.

  • cenakhoa on 22/03/2024 - 21:09
    +1

    You should only lease for 2 year max, or even 1 year. Then you will made a small profit between 5k and 10k.

    2 years is when the interest you paid over leasing your vehicle outweighted the benefit of tax saving!

    The interest rate I check last time in 2023 is 6-8% per year for novated leasing depending with who you are with

    More infomation:

    Lease Term

    This is the period of time the car will be leased. At the end of the lease term there is a residual value amount owing, the value of which is set by the ATO as follows:
    1 Year term, has a residual value of 65.63% of the purchase price
    2 Year term has a residual value of 56.25% of the purchase price
    3 Year term has a residual value of 46.88% of the purchase price
    4 Year term has a residual value of 37.5% of the purchase price
    5 Year term has a residual value of 28.13% of the purchase price

    • whyisave on 23/03/2024 - 00:42

      At the end of the lease term there is a residual value amount owing,
      the value of which is set by the ATO as follows:

      Year Term — Residual Value Of Purchase Price
      1 Year — 65.63%
      2 Years — 56.25%
      3 Years — 46.88%
      4 Years — 37.5%
      5 Years — 28.13%

      Thanks for posting this.

  • apaul on 22/03/2024 - 21:54

    thanks for the info. I was planning top do a 4 years lease for an EV

  • webmonkey on 23/03/2024 - 10:36

    That sounds quite excessive on a 45k car. I think you're being shafted somewhere.

    We've got a 3 yr lease on an 85k EV and after tax savings our lease cost is 1k a month. We don't plan on keeping it after 3 years is up and will lease another EV if the FBT exemption is still around.

  • Herbse on 23/03/2024 - 10:41

    If you bought the car outright you'd lose out on interest savings by taking that money out of your account, and if you used a mortgage redraw, you lose by paying more interest on your loan.
    This is something most people also forget to factor into the math.

    Unless you're using a stack of cash under the bed, getting a novated lease for $50k, you'd be better off by ~$10-15k over 5 years, because you're not pulling the money out from somewhere where it's doing work for you.

    Factor that into your math as well.

    The old "novated lease is not worth it" no longer applies to EV vehicles. There's currently a massive benefit to gain access to a car you otherwise wouldn't buy, but many people are scared when they see the comments and "news" articles scaring people based off old numbers for ICE

  • netsurfer on 23/03/2024 - 10:54

    Not sure about novated lease on an EV being a good idea. When I had my novated lease through the company I worked for, the included petrol cost was a key factor. That portion of the saving per year matters. I didn't care about petrol prices, in fact, the higher the better. However, I had to drive a lot. For me, after 5 years, I wouldn't really want that vehicle unless the lease company offers to me at a dirt cheap price. Also, my colleague told me with the lease, we were allowed to change tires every 2 years, so we all did that (if it were a car I purchased outright, I wouldn't do that). Service centres were nice to us since we tend to agree to even non critical minor repairs / replacements (lease company pays). Another thing is I was more than happy to lend the car to friends and family members.

    For me, it was both the convivence and the tax benefit. Another thing is having a new car every 5 years.

    • the4thzodiac on 24/03/2024 - 09:34

      It is a great idea due to this:

      From 1 July 2022 employers do not pay FBT on eligible electric cars and associated car expenses (if LCT = $0)

      The government will complete a review into this exemption by mid-2027 to consider electric car take-up.

    • serpserpserp on 27/03/2024 - 22:28

      Another thing is having a new car every 5 years

      Another way to look at it is you spent a lot of money and at the end of your five years you give away your car for nothing.

  • Eeples on 23/03/2024 - 13:43

    What is the interest rate for the finance, ask them, if they won’t tell you, or try to avoid telling you……

    Walk away.

  • achew on 23/03/2024 - 13:49

    NL's are great when the % rate of the rental is less than the 10% GST you'd normally be paying on top. That's the long and short of it. Otherwise, you absolutely need to speak to a Financial Advisor, and bring a few quotes on the Leases, too!

  • WaveZero on 23/03/2024 - 16:14

    I think it works out pretty well for people on high income, I know a few people on $250K income in WA and they are savvy with their money.

    They do 1-year novated EV lease, sell off the EV yearly and get a new one each year, it works well for them as they make money from this arrangement due to being able to save 45c of tax for every dollar on the lease.

  • Lemond1977 on 23/03/2024 - 20:02

    Its funny reading this ppl really dont know how to get the best out of a novated lease.
    1 year only = max depreciation, max pretax deduction, minimum interest payment, minimum risk.
    If you dont have the cash to buyout after 1 year, roll it over for another.

    • changyang1230 on 24/03/2024 - 22:38
      +1

      The “12/13 month is the sweet spot for NL” is not applicable for FBT-exempt NL for EV.

      My spreadsheet goes through this extensively and I have spent hundreds of hours in these calculations since I started the spreadsheet and shared it with everyone.

      https://docs.google.com/spreadsheets/d/1CtpBXmuhRW3HrBjqJqnP…

      • Lemond1977 on 25/03/2024 - 14:12

        Its still a sweet spot if you lose your job 1 year into a 5 year fixed term novated lease
        Similarly you can reduce the interest you are paying by rolling it each year should you choose, especially with interest rates forecast to decline.

        • changyang1230 on 25/03/2024 - 14:46

          Yes I concur that if job stability is a concern, then rolling over multiple shorter leases is a reasonable strategy that hedges the risk.

          • Lemond1977 on 25/03/2024 - 14:57
            +1

            @changyang1230: Nice spreadsheet….Novated Leases are pretty complex for those who are new to the concept.
            I've done a few NL over the years, so have a good understanding what I'm getting myself in for and what I want out of them.

  • confetti01 on 23/03/2024 - 22:01

    What do you own at the end when you have paid all that lease money?

    • May4th on 23/03/2024 - 22:16

      the option to purchase the car at x % residual value. the maths really isn't that hard

      • apaul on 24/03/2024 - 07:05
        +1

        +GST

  • Captain Miller on 24/03/2024 - 08:54
    -1

    There is always an alternative. By a quality used car for cash. Use surplus income to invest and secure the tax deductions so many are so obsessed with. If it’s a shiny new car you want - then you shall have it!…… when you have become wealthier from investing.
    Buying flashy cars prevents so many in this world from achieving greater wealth. Marketing companies know the car industry is an offshoot of the fashion industry…..most people buy cars that look good or because they want to appear rich. You just have to look at the amount of young people driving 100k trucks that probably never leave the road. I will bet my right arm none of them own them. All that money pizzed away for a depreciating asset.
    Slaves to the lender.

    • bnh on 24/03/2024 - 08:55

      Buy used car less than 3 yo and lease it back 😉

  • the4thzodiac on 24/03/2024 - 09:40
    +1

    You say you're looking at an EV purchase.

    If so, a Novated Lease is a great option, share some quotes and we can help decipher the costs.

    Typically you'll be $7,000 - $12,000 ahead (i.e. more money in your pocket), on an annual basis, with an EV on Novated Lease (based of rates and quotes from last year).

    From https://www.ato.gov.au/businesses-and-organisations/hiring-a…

    You do not pay FBT if you provide private use of an electric car that meets all the following conditions…

    • the car is a zero or low emissions vehicle
    • the first time the car is both held and used is on or after 1 July 2022
    • the car is used by a current employee or their associates (such as family members)
    • luxury car tax (LCT) has never been payable on the importation or sale of the car.

    The government will complete a review into this exemption by mid-2027 to consider electric car take-up.

  • VluHunt8r on 02/04/2024 - 16:08

    NL is definitely advantageous for anyone $100K or above. We finished our lease 2 years ago and can say we ended up approx $15K better off! Majority of the savings seem to come off GST reimbursements from vehicle price, fuel, rego, insurance etc which in our chase was close to $10K!

    You also need to remove unnecessary inclusions like tree planting, scratch insurances, roadside case, etc. and find your own necessary items through 3rd parties. NL offers for these are a rip-off.

  • Nom on 09/04/2024 - 21:10

    BYD Atto 3 extended range mode

    Under a 5-year novated lease agreement, I would be required to pay $18,000 annually for 5 years

    @apaul your figures are completely wrong.

    For a fifty grand EV, a 5 year novated lease costs in the region of $800 a month - somewhere around $9500 annually.

    Your figures are nowhere close to reality.

    • apaul on 12/04/2024 - 08:34

      Thats the money they deduct from before-tax salary. They typically give you the $change to your take home pay.

      • Nom on 12/04/2024 - 17:17

        The drop in your take home pay is approx $800 monthly. As I said, this is the cost to you.

        If you earn $6800 a month you'll now get $6000 into your bank account monthly with the $50,000 EV novated lease.

        These are the numbers you need to use in your analysis, as others have already pointed out.

        • apaul on 17/04/2024 - 12:15

          Thanks, Does that include tyres , insurance rego, electricty cost? Or just the car?

          Have you looked at the difference between
          total amount leasing company receives (Before tax) - the cost to you?

          Ex. In the above example cost to you is 48,000 ( not considering the residual value of the car + GST on residual )

          • Nom on 18/04/2024 - 21:46

            @apaul:

            Thanks, Does that include tyres , insurance rego, electricty cost? Or just the car?

            Yes, it includes everything except electricity cost.

            Have you looked at the difference between
            total amount leasing company receives (Before tax) - the cost to you?

            It's irrelevant.
            The only number you need to care about is the total salary you got before the lease, and the total salary you get with the lease.

            Yes the leasing company is taking around 10% of the saving - that's their interest rate and business model. But you're still ahead because your saving is more than 10%.

            And note that if you didn't lease, then the loan to buy the car would cost you 6% interest rate anyway. So really they're only taking 4% "extra".

          • Nom on 18/04/2024 - 21:54

            @apaul: Here's a rough comparison for a fifty grand EV, I'm assuming insurance/rego/tyres is $3000 annually (2000+700+300).

            Lease :
            800 monthly = 9600 a year.
            9600 over 5 years = 48000.
            Residual is 12000.
            Total cost $60K if you keep the car after 5 years. Includes everything.

            Buy :
            966.64 Monthly = 11599 a year.
            (6% Car Loan amount $50,000, Estimated interest $7,998, Estimated cost of loan $57,998)
            11599 over 5 years = 57998.
            insurance/rego/tyres is $3000 annually, over 5 years is 15000.
            Total cost $72998 and you keep the car after 5 years.

            • apaul on 20/04/2024 - 01:31

              @Nom: Forget about buying vs leasing. Typically NL companies convince us showing savings calculations

              My main concern is in the difference in amount between before tax deductions and after tax amount(difference in the takehome pay)

              Thats huge and employees are not technically getting the full benefits of all the tax savings government offers.

              One NL company charges 12+% interest rate where bank offer 5% lesser than this.

              Most of the people doesn't look at the difference in the amount.

              • changyang1230 on 20/04/2024 - 09:54
                +1

                @apaul: Precisely the reason why I made my own calculator.

                https://www.reddit.com/r/AusFinance/s/cZHHEjfTXa

                NL quotes give the figure of “tax saving” but it is a VERY dangerous calculation.

                If I buy a 30,000 dollar high end printer for my home office, and get to tax deduct it, a sly salesman could convince me that it’s a great deal because I am saving 14,100 dollars in tax.

                However what is missing in this picture is that if I never needed such a fancy printer, I am NOT saving after all, because after the tax saving I have still effectively spent 15,900 dollars for something that is beyond my need - I could very well have made do with a 500-dollar printer.

                These simplistic “tax saving” figure suffer from the same problem. Is the tax saving a direct comparison to cash purchase, or a 15% car loan? Many of the novated lease are effectively some 10-15% loans under the hood, so when they claim that I am saving this much tax, quite a lot of it are taxes on extra interest that never existed in the alternative purchase method, like the printer that I never needed to buy (but worse, at least with more expensive printer I actually get something extra out of it).

                My calculator does away with this vague and misleading tax-saving claims; instead it tells you in direct terms how much ahead / behind you are simply with cash flow and liability. No hiding behind misleading “tax calculation”.

              • Nom on 20/04/2024 - 10:51

                @apaul:

                Typically NL companies convince us showing savings calculations

                Correct, that's why you need to do the calculations like I just did above.
                It's not complicated.

                My main concern is in the difference in amount between before tax deductions and after tax amount

                This number is irrelevant. You don't need to care about it.

                (difference in the takehome pay)

                The difference in your takehome pay is exactly what I just calculated above 🤷🏼‍♂️
                This is the only number you need to care about.

                employees are not technically getting the full benefits of all the tax savings government offers.

                Absolutely.

                So what ?

                Despite the leasing company taking some of your savings, you're still saving more.

                • changyang1230 on 20/04/2024 - 11:03

                  @Nom: Agree - your calculation is how the exact calculation should be done.

                  On top of this I also calculate the cost of money ie how your home loan interest differs when you fund the car with different methods.

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