Novated Lease: Interest Rate Vs Buying on Traditional Lease?

getk on 08/09/2024 - 07:07
Last edited 08/09/2024 - 11:17 by 1 other user

Hi folks/tax-gurus.

My company offers novated lease and the company offers only a very small range of vehicles and the family option BEV car in the company's list cost circa $60K and the interest rate (APR) of the provider is circa 8% over 3 years on high tax rate.

If I had purchased in traditional way, I would go for a cheaper car around $45K hybrid would pay $30K upfront payment (thus rate on $15K and can pay off in 1 year) but that kind of flexibility is not available in novated lease provider.

  • Is there a good calculator to compare the novated lease vs traditional lease option with initial upfront payments?
  • Is there an option to override the novated lease provider (i.e. purchase outright) or similar options?

Thanks in advance

Automotive Novated Lease

Comments

  • Gunnar on 08/09/2024 - 07:46
    +3

    Based on what you put above, I’d hazard a guess and say novated lease would not be worth it for you financially.

    Been in your boat previously with similar sums and buying the car was a much cheaper option (I also drive maybe 7-10k kms per year)

  • JIMB0 on 08/09/2024 - 08:08
    +5

    These companies prey on the uneducated and take most of the tax saving with high interest rates and fees.

    • Gunnar on 08/09/2024 - 09:02
      +1

      Key word: tax saving

      They will spruik that a lot but but cannot (for obvious reasons) give you an answer the the question ‘what’s the best pathway for me’. NL sales folk are about as trust worthy as the ones selling you the car

      • Chinese on 09/09/2024 - 08:31
        +2

        I think they are worse. At least the one selling you the car can break down the numbers.

    • freefall101 on 08/09/2024 - 11:16
      +1

      Saving the 10% GST, then 30% (or higher) on tax it's pretty hard to eat most of that up with interest and fees. An 8% interest rate is pretty reasonable on a vehicle too, in OPs situation

      • Chinese on 09/09/2024 - 08:32
        -2

        You have forgotten about FBT. Which is not a small amount and will kill off any "tax savings"

        • Gevaux on 09/09/2024 - 08:48
          +4

          No FBT on EVs under the LCT limit

      • No ONE on 09/09/2024 - 12:03

        what is more bullshit is that GST is added back on balloon payment.

    • ozbargainsam on 08/09/2024 - 14:25
      +1

      For EVs this is not the case. Surely, they will take a generous cut in any case but on a high enough marginal tax rate it's very much in your favour. See my link below.

      • Chinese on 09/09/2024 - 08:32

        EV. Biggest winner is the lease provider. End consumer gets the crumb.

  • xzclzj on 08/09/2024 - 09:37
    +1

    Do your calculation. I bought an EV with an RRP of $38K. With a 3-year lease, it works like 0% interest based on my salary. I will also save around $6K on petrol in the 3-year ownership period. I drive around 17-20K per year.

    By the way, not sure who is the package provider, but you should be able to choose self-management and then pick up any EV you want.

    • Chinese on 09/09/2024 - 08:34
      -2

      Meaningless comment without actual numbers shown.

    • SlickMick on 09/09/2024 - 08:59

      What's this self-management? I presume not bypass the lease company - is this just find your own vehicle?

      • Chinese on 09/09/2024 - 09:39

        Purchase the vehicle as fixed asset on the company's book.

  • freefall101 on 08/09/2024 - 11:30
    -3

    Pretty easy to calculate out in Excel. Repayments calc is =PMT(<interest rate>/12,<term>,<loan amount>)*<term>.

    I haven't accounted for running costs (which will also be pre-tax) nor whether your $60k includes or excludes GST. There's also none of the fees. Buying out a novated lease isn't a good plan because you lose all the tax savings, have to pay out a buyout fee and it's a pile of paperwork that's not worth doing. I.e. you can't "bank" the savings.

    I made up the $45k loan and $15k buyout. Also just assumed a 30% tax saving (needs to adjust to whatever your tax rate is).

    Novated Lease Loan
    Upfront 0 30000
    Loan 45000 15000
    Balloon 15000 0
    Term 36 12
    Interest Rate 0.08 0.08
    Repayments 50764.91 15657.92
    Tax -15229.47 0
    Total Cost 50535.44 45657.92
    • oscargamer on 08/09/2024 - 12:11
      +4

      That's a hugely misleading table

      You are comparing a 15k loan against a 45k novated lease…..and 3 years vs 1 year…

      • freefall101 on 08/09/2024 - 13:11

        The loan terms are taken into account, 36 and 12 months - it's right there in the table. It's why the interest cost winds up being $5765 on the lease vs $685 on the loan.

        It's the total cash flow for purchasing the vehicle. If anything, it's beneficial to the loan over the lease because so much of the cashflow is upfront. OP needs to outlay $45k in 12 months vs $50k over 3 years.

        • oscargamer on 08/09/2024 - 17:17

          But if the OP had 30k cash, they wouldn't get a NV…..

          • freefall101 on 08/09/2024 - 22:37

            @oscargamer: Why not? That cash can be put towards other things instead (offset account, investments, etc). Just draw down on it over the 3 years instead. Sure, there's 8% interest, but by paying pre-tax there's a 30%+ discount (depending on your tax rate), no GST and all the car costs (insurance, rego, maintenance) are also pre-tax and GST free.

            Debt is fine to take on when it delivers such a massive tax break. It's basically the best tax loophole that anyone earning under $500k a year can take advantage of - that more people don't is nuts.

      • larndis on 09/09/2024 - 07:53

        Agree it's not a good comparison, but aren't those the options OP is considering?

    • Chinese on 09/09/2024 - 08:34

      FBT? GST in residual cost? Opportunity cost when $30k is in the bank - app 6% in offset account.

      No wonder the NL BS is thriving.

      • freefall101 on 09/09/2024 - 09:41

        There’s no FBT on BEV NL, the rest is just an example of how OP can calculate it themselves, I don’t have the details. They also need to stick in running costs being pre-tax.

        I didn’t consider not buying a car either, because OP said they want a car. The cash flow side and potential interest benefits the NL, as I said above.

        • Chinese on 09/09/2024 - 09:43

          OP did say hybrid for 30k+15k option. BEV tends to work out better purely due to the huge amount of FBT saved (but mostly eaten up by the lease provider).

          Coupled with the odd of loosing/changing job, might not be for everyone.

          • freefall101 on 09/09/2024 - 09:45

            @Chinese: They said BEV for the other option.

            How about you read the post properly before claiming I’m posting BS? Lease providers don’t mostly easy it up either, but OP can easily fill the gaps on the calculation on what the costs are.

            • Chinese on 09/09/2024 - 09:56

              @freefall101: Yes.

              Left out GST on residual btw. Also oppotunity cost of the upfront payment. (Cost of funding).

              The fee of NL provider charges is not factored.

              The 45k car is not BEV, FBT has been left out.

              • freefall101 on 09/09/2024 - 10:10

                @Chinese: You're confused, the $45k with $30k upfront is not the novated lease.

                I don't know what the fees of the NL are, how can I factor those in?

                The $45k car is not going to have a novated lease on it. There is no FBT on it (also hybrids are FBT free too).

                Read OPs post again, carefully, because you're constantly getting it wrong.

                • Chinese on 09/09/2024 - 10:18

                  @freefall101: Then what is the financing cost for the $30k?

                  One is 12 months and one is 36 months. Need to extrapolate for a like for like comparison.

                  And yes, I was confused, initially.

  • Dollar General on 08/09/2024 - 13:03

    Is this purchase a need or a want?

    • Brick50 on 08/09/2024 - 14:11
      +2

      Why’s this relevant? Do you only buy things you need?

      • Dollar General on 08/09/2024 - 14:37
        +2

        At that price point, yes.

        • Brick50 on 08/09/2024 - 14:38
          +1

          Sounds miserable

          • Dollar General on 08/09/2024 - 16:04
            +2

            @Brick50: Perhaps, but I’m one of those weird ones that lives within his means and doesn’t owe a single dollar to anyone

          • beltdrive on 09/09/2024 - 11:02

            @Brick50: living within your means and being debt-free is the farthest thing from miserable

            • Brick50 on 09/09/2024 - 11:14

              @beltdrive: Living within your means and only buying necessities your whole life are 2 different things though

    • getk on 08/09/2024 - 19:26

      A need (As i need to have a car for my day to day work travel)

    • getk on 08/09/2024 - 19:26
      +1

      great link

  • amorphous2111 on 08/09/2024 - 16:26
    +2

    I think novated lease is better, if in doubt just go for 12 month lease.

    Assuming a BEV arround 45k including GST.

    Traditional purchase (cash): 51,000 up front
    Car: 45,000
    Rego, stamp duty etc: 4,000
    Insurance, service: 2,000

    That 51,000 will have to come out of your offset (6.5%) or saving (5.5% or 3.85% assuming 30% tax rate). So your finance cost is $3315 pa maximum. You can’t get any tax benefit here.

    Novated lease
    Car balloon incl. residual gst: 29400
    Car will be financed for a total amount of (45,000*0.9 + 4,000 + 2,000 = 46500) At the rate of 8% your financial cost is $3720. They will charge some $500 for “management” so total financial cost is $4250.

    Even in term of interest alone, you would come out ahead with NL, for modest tax rate of 32% (30 + medicare) because the actual financial cost is 4250*0.68 = 2890.

    But the lease company will make sure that your principal covers the 34% depreciation for the first year, so your total payment will be like 22, 000 pre-tax for 12 months. With a modest tax rate of 32% you would be at least a few grands better off.

    8% is a very good rate for NL, mine is 9.42%.

    • getk on 08/09/2024 - 19:26

      great thoughts. thanks mate

    • Chinese on 09/09/2024 - 08:40

      And is the calculation for FBT? GST for residual value?

      Anyone not in the 45% bracket would be lucky to be a few dollars better off.

  • Chinese on 09/09/2024 - 08:38
    -2

    Can't believe anyone is still trying to "be helpful and advise to NL", whilst not understanding the scheme.

    FBT alone will kill off any savings from "pre-tax" money.

    • changyang1230 on 09/09/2024 - 09:27
      +1

      No FBT for EV below LCT - that’s precisely the reason why it’s become so attractive in the last 1.5 years.

      • Chinese on 09/09/2024 - 09:37

        This OP is on a hybrid?

        • changyang1230 on 09/09/2024 - 09:38
          +1

          They are considering between novate-leasing a battery EV (which has no FBT), or purchasing a hybrid outright.

          • Chinese on 09/09/2024 - 09:40

            @changyang1230: Ah. Then BEV leasing might make sense. Would still crunch the numbers very carefully.

            The same BEV car tend to be more costly than its Hybrid equivalent by a fair margin. (Kia carnival vs EV9 as an example).

            In OPs case $60k vs 45k

  • RMBC on 09/09/2024 - 08:53

    As others have mentioned, one of the key things to be aware of is FBT on novated leases. What I have been unable to find above however is the fact that there are FBT concessions for electric vehicles which means that there is no FBT. As a result, all vehicle expenses are paid using pre-tax dollars rather than adjusting for the private portion

    The benefits of novated leases are the claiming of GST, which you can't do personally, and using pre-tax dollars for any business use portion of the vehicle, rather than paying for the amounts and claiming a deduction later. The sting in the tail is the FBT, which in the instance of some electric vehicles, doesn't apply.

    Essentially if you have a high business use for the vehicle, it is likely more beneficial to finance yourself. If however your business use percentage is low, and it is an EV exempt from FBT, then salary packaging or a novated lease may well give a better result.

  • bjasani on 09/09/2024 - 09:18
    +3

    So far I have find this is the best calculator. I have leased Ioniq 5 using this.

    https://www.reddit.com/r/AusFinance/comments/1c5b9xx/ev_and_…

    Credit: @changyang1230

    • changyang1230 on 09/09/2024 - 09:29
      +4

      Glad to see many like yourself find it useful!

      I developed this to help cut through the obfuscation of the NL providers, and I hope it helps many more make better decision around this.

      EV novated lease is a great deal and gives you great discount even over paying cash (personally I am 46,000 dolllars better than cash!), and are more favourable the more criteria you meet below:

      • ⁠high tax bracket (the higher you are, the more saving you get)

      • ⁠stable job (moving job or losing job are at best troublesome, at worst huge financial loss)

      • ⁠have a home loan offset account (the idea is that avoiding paying cash from day 0 saves you plenty of home loan interest with the current interest rate)

      • ⁠not needing to borrow money (for own house, investment property etc) during the lease term (having NL greatly decreases your borrowing capacity - I once heard that getting a 70k car on NL would reduce your borrowing capacity by 200k or more)

      • ⁠considered the impact on government subsidies (many people would receive less childcare subsidy etc due to the way reportable fringe benefit is used to assess your eligibility and amount receivable)

      • ⁠considered the potential impact of super guarantee (a small percentage of payroll very naughtily use the post-NL salary to calculate your super contribution - if they do, then you may lose some 1000+ per year in loss in super contribution by your employer)

      • ⁠considered your exit strategy at the end of the lease i.e. are you prepared and have the money to pay out the residual. If you don't, you might be stuck with perpetually leasing a car - which may no longer be such a good deal if the government removes the FBT exemption. If you pay out the car then you will own the car and continue to enjoy the low running cost of EV (assuming that it doesn't otherwise give you too much costly trouble - and it looks like most EV will do okay)

      My spreadsheet on novated lease has been well received and does a comprehensive simulation of all the financial impacts - I am quite confident that it considers more aspects than an average accountant's back-of-envelope calculations. I still recommend speaking to an experienced accountant / financial advisor, however, do try out my calculator and perhaps even bring it to them as a starting point.

      • smoothymcmellow on 09/09/2024 - 10:11
        +1

        This is it. Should be a stickied post and end thread.
        Everyone's scenario is different, use the calculator and don't read into blanket statements from people not running the numbers. It made significant sense for me on my EV purchase, it may not for you, check the numbers before buying a car!

  • drprox on 09/09/2024 - 09:43
    -1

    Here we go again

  • supersabroso on 09/09/2024 - 10:01

    The summary with novated leases is that it's only worth it for most people if you do it for one year as it has a magic 35% depreciation schedule. If you are getting a PHEV/EV then that changes the equation and it should be worth it over a 5 year period as it's FBT exempt.

    Having said that, if you are using the car solely for business, you're much better off going your own way and getting a 3 year loan with SWSCU in NSW at 4.99% interest rate as this will be lower than your variable mortgage rate and everything will be depreciated/discounted by 47-62%/year depending on your tax bracket. No novated lease can beat this as they basically take 2/3 of your tax benefit for their profits but you can enjoy 100% of it this way.

    BEV is futuristic and fun, you should go with this if you are willing to splash the cash. However, standard hybrids are the middle ground where the value for money is. Eg. $42.5k for a Haval H6 Ultra hybrid with 7 years warranty that can go 1100km on a tank of petrol can't be beaten. You won't get your money back in fuel savings with a BEV vs a hybrid equivalent. The difference on insurance with a Tesla alone will kill all your petrol savings (additional $1k/year) let alone the $19k up front price difference (additional $1.1k/year in the offset account). Between the two, you are looking at a free 23,000km/year in petrol while the Tesla owner still has to pay for electricity.

  • Marty156 on 09/09/2024 - 10:19

    Just be aware, that if (when) the Government increases the tax rate you might have add additional funds at end of lease.
    Eg: i had a multi year novated lease and decided to pay the balance to own the car.
    Had to pay an additional 10% on that balance as GST had been introduced during the lease time.

    • changyang1230 on 09/09/2024 - 10:29

      Interesting historical note.

      GST was introduced in 2000; are you saying that the residual amount had 10% tacked onto it even though it wasn't a thing when you first started it presumably before 2000? That's pretty unfair, there should have been an exemption.

      But yes anything that lasts for many years are always subject to the vagaries of law changes; one could only hope that everything introduced and set in place beforehand is grandfathered. For example, for PHEV, any lease that is started prior to April 2025 WILL be grandfathered even though FBT exemption for PHEV will end then.

      • Marty156 on 09/09/2024 - 11:35

        Yes,
        And I agree, it's not fair.
        However, all is fair in love and taxes - according to the (very) tiny fine print on the contract.
        Words along the lines of if any changes in Gov fees/charges, you will be responsible for.

  • Flying owl on 09/09/2024 - 11:14

    Hi OP,

    I've had an extensive experience working in a public listed leasing company.

    In my experience,
    I would say it's unlikely you will benefit from this unless you are earning a huge salary $135K and above.
    Or if you are working in a government organisation where they offer extra benefits with salary packaging.

    If you are on a limited earnings/budget and hoping this will give you some "bonus" income - please do not do this.

    It sounds great on paper, but without going into any details -
    it might eat out your post tax earnings if you don't earn large enough salary.

    Especially when it comes to extra maintenance + repairs.

    And if you've ever decided to go with this, avoid the extras (extended warranty, protection, etc) at all cost.
    That's where they get you.

    Just my 2cents.
    And this is not a financial advise.

    Good luck.

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