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Most people assume that a novated lease is a complex financial product or it is an option only for those drawing big salaries, involves tax manipulation and clocking up a lot of kilometers every year. However, if you take the time to understand how novated leases work, you will easily figure out if it is beneficial for you, in case your employer offers the facility.
What is a novated lease?
A novated lease is simply like any other car leasing program; however, the car is leased by the employer, not the employee and offered to the employee for his use. The monthly rental includes the lease installment and the other expenses on account of the operation, maintenance, insurance etc. and is paid by the employer to the lease company. The employer packages the salary of the employee after deducting the amount, which results in a lower total income and lower income tax. There are also other benefits of novated leasing that make it a very attractive proposition.
Advantages of a Novated Lease
Buying a car on a novated lease can result in significant savings for the employee in a number of ways. The most significant advantage is that the salary sacrifice that the employee makes to pay for the lease rental results in saving of income tax. You can use a free online Novated lease calculator to find out how much you can save. Further, the GST credit that the employer gets on the lease rentals is usually passed on to the employee resulting in further savings. The price of the car itself is significantly lower because the leasing company has better bargaining power. The employee also does not need to drive a specific number of kilometers annually and neither does he have to use the vehicle for work. In fact, if the employer is willing, he can even buy a second car for the family and avail of all the benefits.
The Pros of a Cash Purchase
When you buy a car outright, you own the car and can sell it off whenever you like. When you want to change your car, you don't have to worry about making a balloon payment for the residual value but simply trade it in for a new car. When you buy outright, you can buy a car that is older than what most leasing companies will approve of to keep your investment to the minimum. However, you would end up using your own cash for a depreciating asset and also be responsible for the maintenance on top of which, you would be paying higher income tax.
The route you adopt essentially depends on what you want. With a novated lease you get the benefit of lower taxes as well as savings on GST, the purchase price, and a worry-free ownership. However, if you buy it outright, you have the full ownership of the car and the ability to sell it off any time you like. You can also buy a used car or a vintage car that is not available on a lease.