Novated Car Leases Explained – Forbes Advisor Australia

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A new lease is an effective way to finance a new or used car. This involves an employee entering into an agreement with his employer to hire the vehicle. The employee has no obligation to purchase the vehicle at the end of the rental period.

Lease rebates are deducted from an employee’s pre-tax paycheck, effectively reducing a person’s income and requiring less tax to be collected.

Unlike a regular car lease, a new lease does not require that the car be used for at least half of the time for business purposes. Since most employees cannot afford half of their commute to work, new leases provide alternative rental arrangements.

With wages remaining stagnant across Australia, new leases are appealing to many because they offer discounts. Arguably, it is also more affordable than a wage increase, as it does not cost the employer any additional money.

A person needs to be working and earning a salary to qualify for a new lease and this excludes self-employed sole traders. However, business owners can have new leases if they pay a premium.

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How does it work?

Leasing is a way to finance a new or used car through a payment package. The person’s salary before tax is reimbursed by agreement from the employer.

In general, it is a three-way contract between the lender, employer and employee, and requires a rental agreement with the lender or bank, as well as an agreement with the employer to make the payments.

The employer then pays the funder on behalf of the employee, which is deducted from their paycheck before taxes.
If the employee changes jobs, the car goes with them if the contract can be transferred to the new employer. Employees can also pay their wages directly.

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It works like this: a worker with an annual pre-tax salary of $70,000 whose tax deductions total $10,000 a year will see their income drop to $60,000. This reduces the total tax payable.

An accountant can help you decide if a new lease is right for your particular situation. The effectiveness of a new lease depends on a person’s income, the cost of the vehicle and ongoing expenses.

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There are two main types of modified lease agreement – fully serviced SY not taken care of.

A fully serviced arrangement includes the rental fee for the car plus all costs, such as fuel, service, registration, tyres, insurance and roadside assistance in case of breakdown or accident. .

This results in a single payment that combines all the costs of the vehicle into one payment, which some people prefer.

The unpaid contract is only the car rental cost and does not include all other costs related to the car, which must be paid by the employee.

New lease benefits

The biggest advantage is paying less tax, which means you keep more of your paycheck and get a car.

An employee with a new lease does not need to pay GST on the cost of their car. The GST that is paid on the purchase price is covered by the supplier, who can claim a credit against the input tax (this is tax paid by the business on the goods and services received).

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With a new lease, the car can be used for personal purposes – there is no requirement to use it exclusively for business.

Lenders may be more lenient in accepting structured leases, because they are considered less risky in default, because the payments are automatic and come from the user.

New leases are attractive to employers because if their employees leave, they will take the car and the lease obligations with them, and it may be less than managing a company car. It may also reduce the company’s payroll taxes, since their wages have decreased.

What are the disadvantages of new leases?

The new lease agreement is binding on the employee, not the employer. If an employee leaves and transfers to another company, the new employer must agree to facilitate the agreement. Otherwise, the employee can pay as in a regular rental agreement. This is the usual situation until a new user is found.

How to get a new lease

Employers must agree to enter into a new lease agreement with their employees.

Leasing companies will be more lenient in their approval decisions for new leases than for traditional leases. The risk of inaccuracy is considered to be lower, because the salary comes from the employer before the salary is paid.

What happens at the end of the lease?

At the end of a new lease, you usually have three options: pay the remaining amount to purchase the vehicle, refinance the remaining amount to continue using the vehicle, or trade the vehicle in. the new model by entering into a new lease agreement. .

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Frequently Asked Questions (FAQs)

Is a novated lease a good idea?

New leases reduce taxable income and therefore often result in less tax for the employee. For most people, that’s reason enough to make the idea appeal. However, consult your accountant if you are not sure that he will be able to outline the tax implications.

How long does a new lease last?

New leases last from one to five years. At the end of the lease, there are three options: sell the car for a new car, refinance and keep it, or buy it as owner.

This last option involves paying the ‘residual’, which is another term for the final payment. This lump sum is calculated at the beginning of the lease. Shorter-term leases will have residuals, as new cars are more expensive cars. For example, a one-year lease may have 65% of the vehicle’s total value as the remainder.

Who owns the car on the new lease?

During the lease, the vehicle is owned by the finance company. The employee only owns the vehicle if at the end of the rental period, there is a remaining payment, which allows them to take possession of the vehicle. It is his choice to do so.

Does a new lease include car insurance?

Car insurance can be included with new leases. This is dangerous because it reduces the amount of income that has to be paid.

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