Some companies in Australia, especially public ones, as well as hospitals and charity foundations, offer an additional benefit: the opportunity to purchase certain commodities for the money earned before paying the taxes. This is called salary packaging. This feature increases the work attractiveness greatly. People are especially willing to buy a car according to salary packaging scheme.
In order to buy a car using personal car leasing in Australia, you need to receive a written permission from a company you work in. Note that a lot of companies do not want to participate in this procedure because it creates additional paperwork and problems for them.
People often hesitate whether to use financial leasing because of being afraid of some kind of trap. It is impossible to claim unambiguously that this pattern is preferable over other alternatives like a bank loan, for example. Each particular case needs a separate consideration and the general attractiveness of the program depends upon a variety of factors. A type of the car, salary size, intensity of car travelling – all this influences the ultimate decision. Nevertheless, a lot of Australian citizens agree that financial leasing is undoubtedly a very convenient option.
But let’s explain everything in turn.
Novated Lease is an agreement between an employee, an employer and a leasing company.
According to this agreement an employer is allowed to make lease payments from the employee’s salary before taxes. Certainly, a tax administration should be aware of the operations and agree to them.
Three types of leasing exist in Australia. They differ by what is included in the payment.
Partial or Novated Finance Lease actually is the car rental. Expenses for car repair, gasoline, etc. are paid separately from after-tax money. It looks much like a credit.
Split or Fully maintained Novated Lease includes everything: leasing payments, repair expenditures, insurance, registration fees and a special tax (FBT). A special card is issued to pay for gasoline and repair services.
Full or Fully maintained Novated operating lease includes all positions mentioned above and additionally covers the risk that the car cost will reduce to a greater extent at the contract expiration date than is specified in the agreement.
Split is the most widespread type of leasing.
Advantages of Novated Lease
First of all, Novated Lease allows to save on Goods and Services Tax or shortly GST (a 10% value added tax). When the basic cost of the car is calculated, 10% GST is excluded. Similarly, everyday expenses like gasoline or repair do not include GST too. It saves much money. However, the truth is that when the leasing contract expires and a car should be either sold or redeemed GST must be paid. That’s why the savings on GST are rather partial, not complete.
Secondly, you can partially save on income tax because payments are made from pre-tax money. But the reduction of the income tax under Novated Lease is compensated by the advent of Fringe Benefit tax that diminishes the attractiveness of the whole affair.
Another advantage is that you needn’t pay a deposit when purchasing a car. You should simply sign the documents. Comparing to buying a car on credit, it should be noted that frequently the companies that sell cars on credit are satisfied with a minimum deposit of one hundred dollars.
Current expenditures are included into the lease payments. It is considered to be a major advantage of Novated Lease.
Although the size of salary after taxes reduces after signing the lease contract, people quickly get used to it. But the fact you don’t have to spend money on gasoline, insurance and repairs is so pleasant. Leasing company sends client a plastic card, used to pay for petrol and repair services. It’s really very convenient.
Sometimes, when applying for a job, an employer provides a car. Novated Lease makes it possible to choose the vehicle. Instead of simply giving the car, employer offers to buy any car you want and the company will support the salary packaging.
If you are lucky enough to work for public hospitals or charity funds you can take advantage of additional tax benefits buying a car under Novated Lease. This category of employees do not have to pay Fringe benefit tax, or at least they pay only a part of it.
Leasing is a better option if you intend to buy a new car. Buying used cars is possible, but very limited. Typically, the car, subject to leasing, cannot be older than 2 years or have a run of more than 40,000 kilometers. However, disadvantages of leasing also exist.
When the car was bought on a loan, it is usually (but not always) assumed that after, say, 5 years, the loan is paid off and the car further belongs to the buyer. It is not the same with leasing. Tax rules determine that after the end of the leasing contract (which usually is signed for three years) certain unpaid part of the cost of the car must remain. This part is called the residual value and can be up to 65.5%. This part cannot be paid off from pre-tax salary. In addition, residual has GST.
Typically, Novated Lease is beneficial to people who do not use the car for work, but, nevertheless, drive a lot. The more miles you plan to drive per year, the more advantageous lease is.
You cannot make payments to reduce the size of the loan. For example, if a person suddenly won in a lottery, he can pay off his loan on the car and save on the interest. In the case of leasing, such payments are not allowed. You have to pay in periods, defined in the contract.
Interest rates in leasing companies are usually 3-3.5% higher than for the bank loans.
While the car is in a state of lease and has not been paid off in full, it is owned by the leasing company and cannot be changed for another one. For example, you cannot tint glass or attach the tow bar. Or, rather, it is possible, but requires permission from the company before the contract is signed.
Canceling the lease agreement is a rather expensive affair. Fines and payments of several thousand dollars are quite possible.
If you change job, there is a risk that the new job does not support Novated Lease. In this case you will have to break the contract, which is very expensive or pay out of the after-tax wages and in this case all the advantages of leasing are lost.
Who benefits from Novated Lease? First of all, they are people, who love buying new cars and often change them. As a matter of fact, Novated Lease is created for such people. Second of all, those who like travelling a lot by car and drive many kilometers per year. Lease is advantageous because Fringe Benefit Tax is lower if the mileage is big. It is convenient for those who work at hospitals, or charitable organizations (they do not need to pay Fringe Benefit Tax or pay it very small).
The more expensive is the car, the more profitable leasing is. For those who receive high salaries, this scheme is profitable, because of the progressive tax system. In this case the salary must be bigger than $35,000 per year.
People who do not use the car for work, or use it a little (no more than 50% use for work) can benefit. If the car is used for work, the cost of it is already included in taxes. However, depreciation cannot be included in the car costs under leasing. This reduces costs and increases tax revenue.
There are risks that are worth considering before signing an agreement on leasing. The main risk is residual value (part of the car cost, which must be paid after the end of the lease agreement). This part is defined by the tax office. Residual value for 12 months is 65.5%, 24 months – 56,25%, 36 months – 47%, 48 months – 37,5%, 60 months – 28,5%.
You can pay off the residual value in several ways. The first one is paying off to the leasing company, after which the car becomes your property. The second way is to sell the previous car, buy a new one and start a new leasing contract. Leasing companies prefer this option most. If the cost of the new car is bigger or equivalent to the residual value, everything is fine. If it is lower, then the difference is added to the debt for a new car and leasing becomes less profitable. Debt can grow with each update of the car, and it is difficult to quit it. This risk can be reduced if in addition to the lease agreement GAP insurance is included (it covers possible price difference). This in turn increases the cost of leasing.
Leasing companies pay great attention to your choice of the car. The thing is, that they have noticed that after leasing contract ends, some cars are sold at a higher price.
Among the other risks a risk of change of the circumstances exists. In case of changing a job, there is a high risk that the new employer does not maintain salary packaging and Novated Lease. In this case, you must make all payments out of after-tax money.
In the case of dismissal, there is a chance to lose the car and pay large fines. There is a special insurance that will cover 3 months in case of job loss, but again – this increases the cost of leasing.
Due to the fact that the car is used for personal purposes, there is fringe benefit tax (FBT). Because of this tax it is advantageous to include current costs of maintaining the car into leasing contract (gas, repairs, etc.). Method of reducing the FBT is called contribution method and is generally preferred by all, who have a salary less than $200,000 per year.
Internet provides many calculators where you can calculate “savings.” Here you can also find out more about prices, GST, residual value, etc. Make use of the websites of such leasing companies as Zentra, Fleetpartners, or ALP.
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