This is a question that we receive every month and so in this article we will explain why Novated Leases are worth it and include a couple of examples of novated leases compared to Car Loans.
Let start the explanation of whether a novated lease is worth it by looking at a Car Loan and then we will compare it to financing via a novated lease.
At the time of writing this article, August 2019, this is what we know about financing a car via a “secured car Loan” from one of the BIG 4 banks …. we call them the FAT 4 😊
The typical minimum requirements for applying for a loan with one of the FAT 4 is as follows:
- Aged 18 years and over
- Permanent resident or Australian citizen
- Have a regular permanent income
- Hold a driver licence
- Loan is for personal use
There are normally also restrictions on the car being financed and the amount borrowed:
- Imported by the manufacturer (no grey imports)
- Less than 7 years old
- Loan amount not to exceed the market value of the car
- Car has not been written off
- Loan amount of a minimum of $10,000
- Car to be comprehensively insured during the loan term
- No balloon at end of the term
Such loans are generally 12 to 60 months (1 to 5 years) in term. You may be required to put down a deposit.
If the loan amount is less than $10,000 and / or the car is older than 7 years, then the FAT 4 will require you to apply for an unsecured personal loan which attracts a higher interest rate.
Also as the loan is for personal use of the motor vehicle it is unlikely that a tax deduction will be available to you.
A novated lease is a different way to acquire and run a car compared with a car loan. The finance and running costs are normally outsourced to a salary packaging provider. The major features and benefits of a novated lease are as follows:
- The salary packaging provider can assist with sourcing a new or used car at better than retail pricing
- A novated lease is tax effective in that part of the finance and running costs are deducted from your income before tax (“pre-tax”) and thus reduce the income tax you pay
- Pre-tax deductions are exclusive of GST so you save on the GST
- The car can be 100% personal use and still get a tax deduction
- Via a salary packaging arrangement, you can budget the costs of fuel, servicing, annual registration, CTP, insurance, roadside assistance and even car washes to maximise the tax benefits
- Deductions from your salary for the finance and running costs match your pay cycle – weekly, fortnight or monthly. This way you avoid the big annual costs of registration, CTP, servicing and comprehensive insurance
- You will receive a fuel card(s) for the payment of fuel, servicing, maintenance, tyre replacements and roadside assistance
- No deposit is required (nor allowed under tax rules)
- Terms can be arranged for between 12 to 60 months
- A residual in due at the end of the lease – which is normally paid by selling the car privately or trading it in on another car
- You will have a massive cash flow benefit in your salary each week, fortnight or month
Comparison of a Car Loan to a Novated Lease
Let’s show you an example of a car loan compared with a novated lease and the huge cash flow savings you will retain with a novated lease.
We will assume that you earn $60,000 per year before income tax (excluding superannuation) and have no other forms of income or special tax arrangements. The car is a Mazda 3 Neo Hatchback – $23,490 drive away price and you travel 15,000 kilometres per annum.
Example: 36 Month Term