Novated Leasing – What is it & how does it work?
A frequent question we are asked at Oak Financial Planning is “should I buy a new car?”. More often than not, we respond with several questions about the value of the vehicle, reasons behind purchasing and the overall effect of purchasing an ‘asset’ that generally falls in value as soon as your foot hits the pedal. But in reality, for many Australians, a new car purchase is one of the largest purchases they will make, second only to purchasing a home. [i]
For a lot of clients, this decision has already been made and we move on to the next biggest question – how much will it cost? Less often are we seeing people purchasing outright and more often people are using finance for their purchase. The ACCC tells us that “90% of all car sales are arranged through finance, of which 39% are financed through a dealership and around 61% are financed from other sources.[ii]
A dealer will offer you a rate, a broker another and perhaps you are able to novate through your company – but which is best for you?
Novated Leasing – Pre-tax petrol, sign me up?
Novated leasing is a form of salary packaging that allows you to bundle the costs of purchasing and running a car into a salary sacrifice payment. The main attraction – tax savings.
What is it and how does it work?
A novated lease is a three-way agreement between a finance company, an employer and the purchaser (employee). The finance company will purchase a car on your behalf and a lease agreement will be set up defining the term, repayment sum and residual value of the arrangement. Paying with pre-tax dollars means that you’ll enjoy a lower marginal rate of tax on all the running costs such as registration, servicing and filling up at the pump. You’ll also be able to take advantage of the input tax credit applied by the financier meaning you’re not paying GST either, instantly a 10% saving on the vehicle purchase price.
As an employer, it may be worth exploring this as an alternative to holding personal employee vehicles in a fleet. Under a novated lease, vehicles provided are not considered on the balance sheet, meaning they are neither an asset or liability. You may also save on your Payroll Tax and WorkCover premiums, as well as time and money spent with your accounting team going through fuel and servicing receipts.
Does it come down to your pay packet or the km’s you drive?
It always comes down to your individual circumstances – it will be based on how much you drive, how much you earn and how much is the car that you’re purchasing. In this case, it’s best to seek a professional opinion from your financial adviser or accountant. Importantly, you don’t have to be on a high income to benefit from a Novated Leasing arrangement – but you do have to know what your best option is. Other options include:
Dealer Finance – One stop shop
The dealer says they’ll look after everything, you’ll be off the hook for chasing bank documents and completing forms correctly and all you have to worry about is the $$$ at the end of each month. Sounds great? Unfortunately, nothing in this world is free and as you would assume, there must be something in this for the dealer – but that’s not always a bad thing. Incentives in a competitive industry can mean greater service, cheaper rates or perhaps being able to finance with less than desirable credit – they’ll make it happen because they want to sell the car. When purchasing and financing through a dealer, the devil is in the detail and our recommendation is always to seek a second opinion from someone objective and who knows where there might be hidden costs or clauses.
Banking Finance – A broker is your best friend
“I love dealing with my bank” is not the most common phrase we hear, however, the bank isn’t all bad in this respect. Secured vs Unsecured, fixed or variable, redraw, Line of Credit, P2P… the list of terms you need to navigate is lengthy so whilst getting your own finance can often be more cost effective and give you more flexibility than when working with a dealer, it’s important to know what you’re talking about. Importantly, your ability to negotiate on payment structure, rates and residual payment amounts is far greater with the bank and further to this, you can then take your new found negotiating strength back to the dealer and get a better price outright, with full knowledge there is another showroom a few km’s down the road. If you’re one of the 24% who say ‘they’d rather have a root canal than get into car negotiation.’[iii] (V12Data) and negotiating is not your strong point, engage a broker to help you with the banks, provide comparisons for you and get the best outcome. ACA research notes that in 2016, 16% of consumers used a broker for their vehicle finance, whilst 33% used a finance broker website to help facilitate the loan. Further to this, ACA recognised that 81% of consumers did online research about their options even before reaching the dealer.[iv] Finance brokers will generally review a deal for you, compare the market and see if there is a better option for you without cost.
A finance broker may also be able to investigate for you whether there is an option to use secured finance to help further reduce costs by means of an existing home loan or investment loan. Secured finance is cheaper almost 100% of the time – it allows you to utilise an asset that you already own to create efficient lending for a new purchase. Who knows, maybe they will reduce your loan repayments on the house, 2 birds with 1 stone!
Outright purchase – cold hard cash
If you have the capacity and the savings, cash might be a great option to purchase a car. Obviously, there are no direct financing costs and you own your vehicle outright from the day of purchase, however, there may be more than meets the eye.
Ask yourself the question – is this the best possible use of the money right now? Take for example, an $80,000 annual salary, purchasing a $30000 car on a 2 year lease, driving 40,000 km’s per year.
Assuming petrol and running costs are at $250 per week – novating could save up to $5000 per year.
You can then place your funds in an interest bearing account, use this for your repayments and reap the tax saving benefits of the lease arrangement. Over 2 years, you’ve made $10,000, paid the same for your car. [v]
This won’t be the case for everyone, however, it’s important to recognise that with good structural advice, you can potentially save thousands turning your next Prius into a Porsche.
Like any decision, there is always an alternative and we do not often consider this option from an objective point of view.
Our advice as always is to seek professional advice, think about what you’re an expert at and if it’s not financing cars, maybe ask for help.
Written by Dylan Pargiter, Financial Planner on behalf of Oak Financial Planning.
[i] ASIC, Car Loans, Moneysmart (20 June 2017) https://www.moneysmart.gov.au/borrowing-and-credit/car-loans
[ii] ACCC, New Car Retailing Industry: A Market Study by the ACCC, Final Report (December 2017), 27 . http://www.accc.gov.au/system/files/New%20car%20retailing%20industry%20final%20report_0.pdf
ASIC, Regulation Impact Statement: Flex commission arrangements in the car finance market, Attachment 2 to CP 279 (March 2017), 6 http://download.asic.gov.au/media/4172129/attachment-2-to-cp279-published-3-march-2017.pdf
[iii] V12 Data, 25 Amazing Statistics on How Consumers Shop for Cars, V12 Data (12 June 2017) http://www.v12data.com/blog/25-amazing-statistics-on-how-consumers-shop-for-cars/
[iv] ACA Research, 7 Auto Finance Insights You Need to Know: Insights from the new 2016 Automotive Finance Insights Report from ACA Research, Automotive Insights (23 January 2017), . 72 Ibid. http://automotiveinsights.com.au/2017/01/23/7-auto-finance-insights-you-need-to-know/
[v] Novatedleasefacts.com.au, Novated Lease, How Much Money Do I Have to Earn? (15 March 2015) http://novatedleasefacts.com.au/how-much-money-do-i-have-to-earn/
Oak Financial Planning Pty Ltd ABN 78 126 751 335, trading as Oak Financial Planning is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licence and Australian Credit Licence 232706.
This blog article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
If you decide to purchase or vary a financial product, Dylan Pargiter-Green, Oak Financial Planning Pty Ltd and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.