Catches novated lease company never tell you
Some knowledges I have accuqired from using novated lease for last 2+ years.
Assuming you know the basics from google or sales pitches from lease management company, here are the things they never tell you.
Rule of thumb 1) You will start losing money if you lose your job (least till you establish the same deal with new employer, no need to break financial contract in this case.) 2) APR is generally higher than market rate as financier knows your will save $ from tax. 3) ATO ensured you never get any tax benefits from the car itself, you only get tax savings for your actual car use. (explained below) 4) Lease management company will charge you fee, so does fuel card provider. approx. $45/m pre-tax. 5) APR goes up further if your car is 3+ years old if not new and/or less than 3 years lease term
Tax implication Among your expense, 20% of car value need to be paid from post-tax money(called ECM). Means as your car value goes up, your benefit gets smaller hence it’s hardly beneficial for fancy cars. So buying fancy car under novated lease and sell it after some years to make profit never works.
ECM(employee contribution method) and FBT(fringe benefit tax) In Australia, any whatsoever fringe benefit will inccur FBT which is the same as highest tax bracket otherwise exempted. For car lease, there’s a special concession rule which is only 20% of your car value subjected for FBT. Further, you can eliminate this via paying the same amount from your post-tax payroll so-calle ECM. It’s better than paying full FBT unless you are in highest tax bracket for $180k+ income.
Sourcing the car For new car, you can save 10 % GST from car price as it considered as business purchase. Yet your FBT base value (20% of car value) will be higher than used car as largest portion of depreciation coming from 1st year. For used car, financier will ‘purchase’ your car and repay all the outstanding car loan if any and pay you cash for remaining. Works like low APR loan considering tax savings.
fuel card It’s something like credit card issued by lease management company which you can use in most major gas stations. It costs about $5/m (pre-tax) fee but you can avoid hassle of submitting reimbursement request along with tax invoice.
Residual value it’s an ATO hidden trap for this scheme. ATO logic is you ‘purchase’ the car from financier for ATO set value, incl. GST. It’s technically balloon interest payment to financier so kinda BS. What it really means is, you can’t pre-tax pay set portion of your lease payment(=loan) and it varies based on lease term. http://law.ato.gov.au/atolaw/view.htm?docid=aid/aid20021004/00001 For example, you can pay over 70% of your loan from your pre-tax payroll for 5 years lease yet it will increase loan interest amount as well.
What you can/can’t package Can: insurance, registration, petrol, replacement parts, maintenance and car wash Can’t: parking, toll-way and part that increase your car value e.g) GPS, alloy wheels
Still not sure? Here is a realistic example, not lease management company provided magical numbers saying you can save thousands of dollars every year no matter what.
Scenario: $10k car with 10% APR 3 years lease and spending $1k for petrol.
car value: $10,000 interest: $3,000 residual value 46.88%: $4,688
Yearly expense breakdown: lease payment: $2,770 petrol: $1,000 Insurance: $1,000 *Registration: $750 Maintenance: $500 On-road cost total: $3,250 In total: $6,020
post-tax payment required: $2,000 Your yearly pre-tax payment: $4,020 minus fee $45/m*12: $3,480 with 34% tax rate, tax saving is: $1183.2 GST saving from on-road cost: $325 Total yearly saving: $1508.2
In 3 years term: $1183.3*3 - $3000(interest) = $549.9 + interest saving(if received car loan) or interest income(if sold your car) + tax time benefit such as avoiding MLS or low income tax offset *not 100% of registration fee is subjected to GST but deemed as 100% for easier calculation.
It always better than private car loan. It doesn’t have much value over cash purchase. It gets more beneficial if you drive more and your car has less value. Better not sign up if you have a fancy car and don’t drive much.