How Does Novated Leasing Work?

which this podcast is recorded on a wondery country. Acknowledging the elders, the ancestors and the next generation coming through as this podcast is about connecting, empowering, knowledge sharing and the storytelling of you to make a difference for today and lasting impact for tomorrow.

does anvadd lease work? So what you'll do is you'll find a new or a used car that you want to purchase. You'll decide whether it's good. I can't help you with that as to what a good car is. You enter into what's called a lease agreement with a finance provider or a bank. You then enter into what's called a salary sacrifice arrangement with your employer to cover the car lease with repayments coming from your pre tax salary.

You can also sometimes include car running costs in your lease, so things like servicing back and petrol, which is very attractive because you know what's really expensive petrol? Very true. I don't even want to talk about it. How salty I get with how expensive it is to fill up my entire tank, which is a privilege in itself.

sure that your new employer approves it. Okay, And there's the probability that they may go, oh, I'm so sorry, Beck, we don't offer that. Sure, which is okay because they don't have to offer that. I wonder about credit checks. I'm sure we'll get to that at some point. What do you mean, of course there's a credit check. You're speaking out of line of credit. Absolutely, there's the employers paying them, Yes, but it's in your name, coming from

your income. I about them. Yeah, so your employer also pays money into your account.

And then this would be an additional add on where they actually slice some of your take home salary off and transfer it to pay off your car lease. So it's not as though the lease agreement is with them. What happens is the lease agreement is with you, but the agreement is that your employer uses your pre tax salary, which means it can't come through your bank account. Right, Okay, so clear that up. Yeah, But just for the sake of people listening, can you give us an example.

novated lease payments they come to ten thousand dollars. This means that your quote taxable income becomes sixty thousand dollars if you pay all your novated lease payments from your pre tax salary, So what you actually declared to the tax office and pay tax on is sixty thousand dollars instead of the seventy thousand dollars, which is arguably very sexy. This means you'll obviously pay less tax over that year, which is why so many people are attracted to novated leases.

Your finance provider or an accountant can obviously help you work out the potential savings and other things you're going to need to consider before entering into a novated lease based on your personal circumstances. So obviously, I keep saying it's really sexy, and I really need to get a better descriptor, but I have none, and I lack a lot of creativity, so we're just going to keep calling

it sexy again and again. But that means obviously you're reducing the tax that you pay, but another sexy option is that it could drop you down a tax bracket. So if you're sitting on what's called a CUSP, which is where we know that the average marginal and most common marginal tax bracket in Australia is between forty five thousand and one dollar to one hundred and twenty thousand dollars per annum, which means you pay five thousand and ninety two dollars in tax plus thirty two point five

cents in every dollar over forty five thousand dollars earned. Okay, that means that hypothetically, beck if you earned twenty thousand and one dollar, it would mean that you fall into the tax bracket of paying twenty nine thousand dollars in tax plus thirty seven cents in every dollar, which is different to the five thousand plus twenty two point five.

That's a lot of a difference. It means that if you then maybe used a structure like this on your twenty thousand and one dollar salary and you had no vated lease payments of ten thousand dollars, you would actually drop to having a taxable income of one hundred and ten thousand dollars, which actually takes you back to that thirty two point five cent tax bracket, gotcha, which could

be very attractive. And obviously it only works in very specific circumstances where you know you are on that cusp, you're just over and the payments that you're making on an ovated lease actually take you down a tax bracket. But sure, it's definitely worth looking into. Yeah, like if it makes sense for you and your personal circumstances. So if it's a lease, is it like a real debt? That is a very good question, and yes it is, And I think that that's where we need to really

talk about it. I called it sexy multiple times because that's really attractive. Right, it's pre tax Right, we can buy a bigger, better car, Beck, we can all go get land cruisers. Do we need land cruisers? No, you live in the city, you don't need a land cruiser. You don't even go four wheeling, Like that's not an option. But you mate has one, so you need one. And you know what, I guess my work, they often evaded leasing. It's a slippery slope of making a decision because you're

justifying that it's a good financial decision. Yeah, because you're like, well, it's pre tax, that's very attractive, and it means like you get a more expensive car totally and the money would go further. And you're not wrong, But any debt that is not creating wealth for you is a bad debt. So I would look at an ovated lease as a bad debt. Let's see it as a good debt. I see it as something that is not helping you create

future wealth. And I mean there is the argument that the car could be worth more when you come to get rid of it or dispose it. I don't give two flying slippers say it said that. I kind of look at it and go no. At the end of the day, a car is a depreciating asset. And I would hate for people to justify buying more or spending more, because ultimately that impacts your take home income, and that ultimately impacts your ability to invest and save and create

financial freedom. And as much as you can justify it and be like, oh, we need this, we need that, like you arguably don't. Okay, Like it is a luxury to afford a brand new car. Even now I'm looking at purchasing a new car, Beck, And you know, Steve and I are in a financial position where we could afford a brand new car. I could go and get a lease on a brand new car tomorrow. I can't think of anything worse. I will not be buying a

car on finance. Is it a good financial decision? Sometimes? Yeah, a car lease, especially as a business owner where it can be in the business right, like I could novate lease my own car. I'm terrified of bad debt because I'm not responsible. I can't be held responsible, Beck. So at the end of the day, you've got to know yourself as well as know the structure. And it's like credit cards, right, some people are really good at managing credit cards and they use them for cycling through points

and they get all these business class flights. Like we've spoken about Brooke before on the podcast, who is one of our team members. She like stealtz credit cards like she is the queen of making sure that she's getting all of the sign on bonuses and then disposing of the credit card or using them in really constructive ways.

I'm going straight to Lululemon. If you give me a credit card, cannot be trusted, Beck, And that's where you should look at an ovateed lease and go, well, actually, is this a good financial decision If you need a new family car and it's something where you go, Beck, we've been meaning to get it, Like the only option is going to be you know, a car loan. That's fine, This could be a really really valid option that actually puts you in the best financial position for taking on

debt for a car. Sure, and that's great, but it's still debt for a car, and we need to see it as that, not some shiny benefit that your business offers and you can absolutely take advantage of it, Yeah, because I think a lot of businesses use it as a shiny upgrade, like, oh, well, if you're signing on beck one hundred thousand dollars salary package and we do novated leasing, Okay, that is great if it applies to your circumstance, But more often than not, it's just a way to keep you in debt.

three years. Yeah, that is what a lot of people think. So a lot of people go, all right, well, I'll get an ovated lease, you never own the car, I'll pay my novated lease payments, and then in three years, once I'm done that lease, what we'll do is we'll go back down to Toyota. We'll get a new car that on a ovated lease and start cycle again. So you never actually ever own a car that you're paying off. Right, it sounds really tax effective, but you're leasing it instead

of paying the car off completely. There are certain circumstances where when your norvated lease has expired, you can purchase the car for a discounted rate and it sends up being okay, and it would then move into your personal name and not have the tax advantages that it previously had. However, rocks in their head. Nobody in their right mind needs

a new car every three years. Controversial opinion. I hope my friends aren't listening to this episode because I've got a couple of them that literally get a new car every three years, because they're like, oh, it's three years old. I've got to get rid of it. Clah, My car's from two thousand and six. I've been driving it since twenty eleven. You will have to pry it from my cold dead hands. And I've been talking to my husband. The only reason that I would feasibly get rid of

it is because it's a two door Coupei. Because like when I bought it, I thought I was so cool. Back, I thought I was so cool, right, I bought it at university and like hot stuff. Two doll coupei all on debt. Obviously, of course all on det But I have my two dog Coupay, and I was very excited about I still love her a lot. But the only reason I'd get rid of that is because a two door Coupei didn't suit our lifestyle anymore, right, gotcha? You know?

Putting baby seats in the back of a two door Coupei, that would be hell, this is not great. I mean, we could make it work technically, but I'm not that stubborn. That's obviously my personal opinion. You might think, oh, well, I actually do for these reasons, for safety reasons, like you could come up with so many good debate. Sure to go, but V yes, I do need a car every three years. I've done all the maths, I've done this,

I've done that. At the end of the day, a car is a depreciating asset, and if you have one and you completely pay it off and then you run it into the ground, that will arguably, always, always, always be a better financial decision. Then you're getting a new, shiny car every three years.

have that. I'm not gonna argue with your values. That's what I am going to do is make sure that you're as educated as possible so you know the ramifications of the decision that you're making, and then you can still make it. That's fine as long as you've got the education behind you so that you go. You know what, I don't care like some things in life are wastes of money. Yeah. You know what's a waste of money? My eyelash extensions. Am I still gonna get them? Absolutely?

Because I feel real hot when I have them back? Absolutely? Does that mean that everyone always has to make the best possible financial decision. No, no, but you have to make it in line with your values, and you have to be educated to know that the decision you're making might not be the best one, but it's the best one for you.

that your taxable income is reduced. The benefits also depend on the way that your lease is actually structured BECK. Some leases might package car expenses like registration and fuel and tires and insurance together, so your repayments cover all of these as well, Whereas some employers may also allow you to pay part of your norvated lease from after tax dollars.

so GST free for employees. The GST you would ordinarily pay on the purchase price is covered by the finance provider and they can claim an input for tax and GSD, by the way, is ten percent if running costs are included in your novated lease. These can actually be packaged to employees with their lease payment without GST, as the employer claims the tax component back as an input tax as well. I see. Okay, just means again you know

how we talk about like franking credits and stuff. Things have little tickets on them to be like by the way, this one's tax free, or by the way, it comes with a certain benefit, and input tax credit is the same as that, but it's for a business. Okay. Yeah, So like GST is kind of like left pocket right pocket.

Like when you're a business owner, you pay GST and then you also get GST, but all the GST that you collect actually gets paid back to the government, so it's like I charge it, but that doesn't come into play with my profit. Whereas for you, beck, as a consumer, when you go to the shops and you buy a new drink bottle, for example, there will be a goods and services component that you pay, but you can't claim

that tax time. This changes that circumstance. So someone in the background is making the GST effective for you, which is kind of attractive. Yeah. I love that. Also, last point on this, like in the pros area, is compared to other kinds of finance like a direct car loan, an ovated lease gives you a few different options for

what you do when the lease term ends. So you can pay off the residual so that you then own the vical like we're talking about before, you could renew the lease for a longer term, either with the same vikel, or you could upgrade, like you were explaining every three is you could upgrade to a new car. Or alternatively, you could sell the car and pay the residual off to the financer, and then any profit you make is actually yours to keep. That's free. That's pretty cool. Yeah, Okay,

now I know it's not all pros. So we need to bring the mood in here to you need.

work to set it up. But you might also want to just take over the repayments completely, which would mean that they are no longer pre tax than our post tax. But you can just keep paying off the lease. It just means it would be more expensive technically, gotcha. When you have a car under a novated lease with your employer, the federal government considers it to be a fringe benefit,

so then fringe benefits tax might apply. So while employers are liable to pay fringe benefits tax, in the case of novated leases, this cost is generally then passed on to you to pay from your pre tax salary because the employers are kind of like, well, this is all benefiting you. Why would we pay a different tax on your behalf when it's you incurring it directly because you

wanted a car. It's also really important to understand how this and any other financial imployers arising from entering into

an ovated lease can impact you. So I guess my last point Slash it's not a con but it's a point is if you're going to do it, please just talk to your accountant or a financial advisor or someone in the know, so that you can look at all the personal pros and cons and what it actually means for your financial situation, because, as I said, I just think people get a bit like really excited about it because it's such an attractive option and like obviously, innovated

leasing companies have spent a lot of money on their marketing to be like, Beck, this is such a tax effective thing for you. You're basically making money and then does look pretty sweet. Yeah, but then you go down to Toyota or whatever. We're not sponsored by Toyoda. Just I walk past a Toyota dealership most days, so it's just like the one in my freshad.

financial freedom, and that's important to understand. It's a really good place to go on a quick break, A little quick break after the break.

twenty twenty four. Obviously, different financial years are going to be different, so diy your own mats if the year is different to when you are listening to this. Any car running costs that are included will also be GST free, so you're not paying GST on petrol, you're not paying it on servicing. It's like a little ten percent discount right there. You'll be saving on income tax by making novated lease payments from your pre tax salary, so like

salary sacrificing your car. And if you're nervating an electric vehicle or plug in hybrid, see this is where people are going to start justifying Tesla's beck. Obviously, up to the luxury car threshold, you won't be subject to fringe benefits tax or FBT on your lease. So that's what we said before. You could if you buy a hybrid vehicle or electric vehicle. Sure, well there you go.

and car insurance. And it's like then all combined into your lease repayments, so it's a set figure every single month. And then for fuel, you get given what's called a fuel card. So you might have heard of those before. And it will depend on where you live as to what service stations you can go to fill up, because you'll need to pay for fuel from your fuel card because it has the allocated pre tax dollars on it.

Oh okay, that's pretty fun. I wonder if you can slip in a like cheeky little curly wurly while you're at the chickau a little sausage roll, Oh, sausage roll card. I'm just wanting to get the like ninety cent curly Welly. Do you think curly wellies are still ninety cents? I think so?

every single employer offers. And if you leave your job with a novated lease, the car will be what's called denovated and you're going to make payments as you would with a standard lease, from your own funds, so like from your post tax income directly from your salary until you're employed again and pay a salary if your employer consents to, you know, putting your car or novated lease.

And if you find a job with an employer who agrees to pay for a novated lease, you're going to be able to what's called renovate your lease and then continue to make payments as you did with your last job. So no, it doesn't tie you to your job, as the tax free component might not be that attractive to you if you have to pay it for any period of time.

to be giving you some tax benefits for that. The second option BECK is refinancing the residual value to continue using the car. You know, let's pretend you're three year lease ended and you're like, okay, cool, but I really want to keep the car, don't really want to pay it out because I either don't have the funds or actually still want the tax benefits of it. Can I keep paying it off in the same way that I am. Let's you know, do a longer lease period, renew it

same car, let's go and it continues off. Or you could trade that cut in and upgrade to a new vehicle and enter into a fresh please agreement. And that's where I think it's a slippery slope because.

you've entered into. It's kind of like, you know, when we talked about a thirty year term on a mortgage and I'm like, all right, well, let's say you've got a five hundred thousand dollar house and at the end of your thirty years, Beck owns one hundred percent of that property because you're paying your principal and interest off, right, So it gets to five years and you go and sit down with Kate, your Zella money broker, and Kate says,

all right, well, let's refinance. Thankfully, Kate's really smart because she's a Zello money broker, and like, we literally care so much about your financial futures that we would never let you reset that term. Sure, we would always go Okay, instead of re entering into a thirty year term, we're going to enter you into a twenty five year term

for this. We're obviously going to reset, you know, your interest rate, you know, bring it down a little bit, but we really don't want you to have to redo that five years that you've already been paying your property off. So we're going to just set this term over twenty five years, so that in that same thirty year period, you're going to end up with one hundred percent of

this property. Okay. Whereas with car loans, if you get three years in and then you say, hey, Beck, one new one going to go upgrade, you go back to the very start and you start paying off another car. Sure, you're never going to own one hundred percent of that asset. Yet you're paying thousands of dollars towards this asset for the privilege of driving it, but never fully owning it. I don't know, a waste. Hey, that's where we're trying to go. I see, I see, I see. I'm not

saying it is a waste. It can be very constructive. As we've said, there's so many benefits to it. But I think we need to balance those benefits and go, well, actually, what's the ultimate out? Sure, because like if I sit you down and go, Beck, well you know you need a car, and you go yeah, absolutely, Like V it's not an option. I have to get from A to B. I need a car. I've looked at every other options and horse is not going to work. I can't ride a kangaroo to work every day. Like, it's just not

gonna work, okay, right, non negotiable. Beck acquires car? Yes, but Beck, what's the long term goal with that car? Like, you're gonna have to get from A to B. Yes, I guess for the next thirty or forty years, because it's gonna keep working, right, So car might be completely necessary. You drive to Sydney a fair bit, so, like, that's

important that you have access to a car. So it's not that you're gonna have the car for the three years, right, You're hopefully going to be a car owner for the rest of your life or as long as your license

allows you, you know what I mean? Like, why are we only looking at the first three years when you know tax efficiency means that yes, it is the most beneficial tax option in the short term, but in the long term, is it not better to buy one car, pay it off completely and have these costs coming out of your post tax income and not be paying a consistent lease for a brand new vehicle. Yeah. So I think it's just really important to understand why we might

make these decisions. Okay, in the short term and in the long term, like you might go, you know what, I've looked at this, and anvated lease really works for me because I actually don't own a car at all at the moment. These tax benefits are going to really work for me. I'm going to get this novated lease. I'm going to you know, paid off for three years.

In three years, they're going to offer me the opportunity to pay the residual value on the car, because like, oh, can we renegotiate that, just stretch it out a bit further. I'll pay more off, but I want the tax benefits. So you stretch it out for another three years. You show a car for six years, car's basically completely paid off. Now you decide to put that in your personal name and go, you know what, we had a really good run. I was paying for fuel and stuff out of my

pre tax income. Now it's out of my post tax income. But I don't have a car repayment anymore, so actually have a lot more money to play with.

of jail early clause. Right, So when you take on an ovated lease, you agree to lease the vehicle for a set period of time, and then if you break the lease early, you're going to have to pay the remainder left on the lease along with the residual value of the vehicle including gst Okay, So if you want to get out of it early, it might not be the best financial decision because it might actually cost you

a bit more. Sure, but you've just got to be careful read all your terms and conditions and make sure that you understand all the t's and season fees involved. Huh, I'm just really good at reading ads. You've done that.

to lease? So, as we said before, novaded leases are particularly attractive for people who want to buy like electric Vickles are hybrids, because you get out of the FBT, which is kind of attractive because they now have that exemption as long as the value of the car is below what's called the luxury car tax threshold for fuel efficient vehicles, which this year in the twenty twenty three twenty twenty four tax year is eighty nine, three hundred and thirty two dollars, which is so much money for

a car. Beck, Yeah, And obviously this considerably boosts novaded least tax savings. Yeah, okay, okay, I got you when it comes to how many kilometers you're going to be driving on this. So generally, people who use their car a lot are going to get a whole heap more benefits through saving on fuel and other running costs, including part of the lease. So I've worked with clients where it actually genuinely makes financial sense for them to consistently

have an ovated lease. Good example, they're a BDM for financial advisors. Their job is to drive around all the financial advisors in the state that they manage. So they go from their house every single day. They might come into the city and go to the office. They might then go out to you know, none a Wadding and then they might be in Dandingong, and then they might be over in elston Wick, and like they drive around

the city a lot. In these circumstances, anvated lease might make sense because you're putting your car through a lot. There's obviously a lot of wear and tear happening on their car. There's obviously a lot of fuel costs in that circumstance, and that could actually make sense as a part of that salary conversation when you go, hold on like this is actually more of a work vehicle than it is actually just like a I really wanted to

drive a Tesla, got a situation, you know, gotcha? So the purchase price of the vehicle we also want to look at, So like too low, the GST savings might not be enough to offset the lease costs. But then too high and the savings as a percentage of the vehicle's value will become very low. And mistake to avoid there is buying a more expensive bigle than you need in an attempt to maximize tax savings. Gotcha cut that out.

Don't do don't do that, don't do that. We need to understand lease costs, so innovated lease will work best if you can get a deal with a competitive interest rate and low lease fees. So, as I said before, we need to understand our t's and season fees. Don't agree to anything without that. And obviously we need to understand things like administration fees that are going to be charged by the lease company, not just your competitive interest right.

Understand what the least term is. So similar to other kinds of finance, you could reduce your interest or other costs by choosing a shorter term. So you might be offered a seven year lease, go what would it look like over three? What would it look like over five? Can you will afford that? Does that make sense for you?

And a smarter proach I've scene for some people is to choose the shortest term possible while maximizing the percentage of the vehicle you pay off by the end of the term, and then do it across as many financial years as possible, so you're maximizing tax savings. That is so clever. I've talked about nervatedly sing a million times before with like friends and family and trying to understand it. And I think the one thing that I really want

you to understand is that nervatedly thing makes sense. Yeah, Like, I've just explained it all. They are obvious pros and obvious cons. Sure, but the thing I don't want you to get stuck on is justifying a more expensive purchase because it's better for tax. Right, So we're not going to do that, are we back?