Purchasing a new vehicle as an employee? Novated lease explained…
Could a novated lease be a good option for your next vehicle purchase?
A novated lease is a leasing agreement that allows employees to finance a vehicle using their pre-tax income. It is a three-way agreement between an employer, employee, and leasing company.
As an employee, you purchase the vehicle from a leasing company and then enter into an agreement with your employer and financier to salary sacrifice part of your salary to make the lease payments.
Novated leases are common throughout Australia and there are some significant benefits to be gained.
But is a novated lease right for you? It’s all explained below…
Benefits of a novated lease explained
The terms of a novated lease can be anywhere from one to five years.
Each payroll deduction reduces the balance of the lease using pre-tax salary. This provides significant tax benefits compared to simply financing the vehicle on your own.
Another big advantage of a novated lease is that all running costs including fuel, insurance, maintenance, and tyres are included in the same payroll deductions (depending on the lease type you choose).
Additional benefits include:
- Significant income tax savings
- GST savings on the purchase price and running costs
- More flexibility in choosing your vehicle
- Unrestricted vehicle usage for work and for private use
- Complete car management
- Flexible terms that fit your financial situation
Note that novated leases include a residual value amount that must be paid to the financier at the end of the lease term.
The minimal residual value percentages are set in a scale by the Australian Taxation Office.
Vehicle options and restrictions
With a novated lease, you have a great deal of flexibility in your choice of vehicle.
However, there are some restrictions for the types of vehicles that can be leased, most notably:
- No vehicles in excess of one tonne
- No vehicles older than 12 years at the end of the lease period
- No vehicle seating more than eight passengers
- No vehicles without the proper compliance plates
- No motorcycles
A novated lease is available for used vehicles as well as new vehicles. However, certain restrictions apply on the minimum value to be financed and the vehicle’s age at the end of the lease.
Novated lease explained: Overview of residual values
All finance lease agreements depend on the lease terms.
- Selling the vehicle:If you decide to sell/trade your car, you are responsible for any difference between the selling price of the car and its residual value. However, any profits made from the sale are yours to keep completely tax-free.
- Refinancing the car:If you would still like to continue with a novated lease, you can easily do so by refinancing the car and taking on a new lease.
- Paying off the residual amount: Paying off the residual value gives you full ownership of the vehicle. All prepayments end and you become responsible for all running costs.
Which option you choose depends on your financial situation. It is therefore in your best interests to seek professional advice before proceeding.
Getting started with a novated lease
Obtaining a novated lease for your new vehicle purchase is much easier than you think. It involves the following steps:
- Confirm that your employer offers a salary sacrificing option
- Choose your preferred vehicle
- Estimate the number of kilometres you expect to drive per year
- Engage Paul Johnson from Fleet Network (details below) to negotiate the best price and provide a detailed quote
- Complete your finance application
- Have your employer sign the Deed of Novation and Salary Package Quotation
- Allow Fleet Network to coordinate between the financier and the dealer
- Take delivery of your vehicle
- Have regular deductions made from your salary
If you would like a novated lease explained further or to discuss your circumstances with Ascent Accountants, please contact us on 08 6336 6200.
Alternatively, through our association with Fleet Network, you can contact them directly via the below details:
Paul Johnson on 0411 241 835 or paulj@fleetnetwork.com.au
Ryan Murphy on 0401 522 626 or ryanm@fleetnetwork.com.au
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One of the most powerful decisions you can make with your superannuation is whether to run your own self-managed super fund (SMSF) and whether to invest in property through it. Most people know it's possible to use super to buy property. Far fewer know how to do it well. The following seven tips are designed to help you make the right decisions. 1. You Can Borrow Money to Purchase Property in Superannuation. Don't have enough in your SMSF to buy an investment property outright? Since 2008, superannuation held in a self-managed super fund can be used to borrow money for property purchase. This is done through a 'limited recourse loan' using a Bare Trust as the Custodian entity. You can't borrow the total value of the property—typically it's up to 80% for residential properties and 60% for commercial properties, with the required deposit held in the SMSF as security. The SMSF then makes the loan repayments, with rental income received by the fund and property expenses paid by the fund. Importantly, if there is a default on the loan, your other assets in the SMSF are generally protected from standard debt recovery and bankruptcy proceedings. The lender only has recourse to the property itself. Upon completion of the loan repayment, ownership of the property transfers legally to the SMSF. 2. Follow These 8 Steps to Set Up Your SMSF Setting up an SMSF properly can be a complex process. It’s best to set up an SMSF with the assistance of a qualified superannuation advisor, like us! We can assist with both the initial setup and the ongoing management of your fund. There are eight core steps to SMSF set up: Select the appropriate structure and name Sign the trust deed that covers how your SMSF is set up and run (it can have up to four members) Establish a trust for the SMSF by investing assets into the fund Register your SMSF with the ATO Set up a separate bank account for your fund Submit your tax file number (and those of any other trustees) Obtain an electronic service address to receive employer contributions into your fund (if applicable) Roll over funds from your existing superannuation account into your SMSF 3. Keep a Liquidity Buffer If you're buying property through superannuation, make sure you plan to keep a liquidity buffer of cash and/or shares in your fund. Lenders will check for this before lending to you—it should be at least 10% of the value you intend to borrow. But beyond satisfying the bank, it's simply good risk management. Property is an illiquid asset. Having accessible funds in the SMSF means you're not caught short if repairs are needed, the property sits vacant, or an unexpected expense arises. Because superannuation is central to most Australians' retirement security, the government has carefully regulated what can and can't be done with it. They don't want people gambling their retirement away on poor investments or incorrectly using their superannuation fund. 4. Use the Rental Income to Repay Your Loan You cannot live in the property you purchase through your SMSF until after retirement. Most people purchase an investment property and use the rental income generated to repay the loan—which makes excellent financial sense. The key is selecting a property that rents easily and delivers a strong rental return. Your purchasing criteria may look a little different to buying a home you'd live in yourself. For example, proximity to public transport, local amenities, and average rental rates in the area matter more than personal preference. 5. Get It Right and Enjoy Significant Tax Efficiencies One of the most compelling reasons to invest in property through superannuation is the tax efficiency on offer. These benefits can significantly improve the long-term return of a property investment compared to holding it in your own name. Key tax benefits include: No capital gains tax or tax no yearly investment earnings if under super caps. Salary sacrifice advantages if you're sacrificing salary payments into super, loan repayments are effectively tax deductible. Capped tax on investment income—the maximum rate of tax on income after expenses is 15%. Any capital gains on investments held for 12 months or more, is taxed at 10%. Standard investors outside super can pay up to 47%. 6. 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If you want assistance managing the property within your fund, contact the Ascent Property Co team .
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