Novated Leases Explained

Have you ever heard of Novated Leases? Perhaps Salary Sacrifice rings a bell. If you want to know more about Novated Leases, I’ll explain them - In real language, not accounting lingo. Novated Leases can be a great way get a tax deduction when buying a car. And the truth is, not many people know about them! Novated Leases are suited best to people with a stable income since these agreements are reliant on an employer who is on board with the idea (most are, once asked). We’ll explain here how you reap the benefits of making use of pre-tax dollars while your employer doesn’t lose out either. Everybody wins! It’s important to note that if you are planning on purchasing a car for work purposes, Novated Leases probably aren’t for you. When you use your vehicle for work, everything from purchase cost, finance costs, maintenance, registration, insurance and fuel are able to be claimed as part of your tax return (you can see more information about this here) so salary sacrificing or Novated Leases aren’t suited to this particular type of employee. However, if you’re in the market for a new set of wheels to drive you from A to B, don’t use your car for work purposes and are in a stable job, then Novated Leases are potentially a great way to effectively get a part tax deduction for your vehicle. Here we’ll cover everything from what a Novated Lease is to how you can benefit them and everything in between. What is a Novated Lease? Essentially a Novated Lease is an agreement between you, your employer and a leasing company. It’s basically a fancy term for a contract where your employer makes monthly lease payments to the financial company from your pre-tax and post-tax income (don’t freak out, we’ll go over this later). With a Novated Lease you are able to purchase a car and have your lease repayments paid with a mix of pre-tax income (before your tax is deducted – that’s where the tax deduction is) and post-tax (your net take home pay) rather than if you just purchase the car, you will pay the finance company and all other costs including rego, fuel etc from your post-tax (your net take home pay). The Pre-Tax payment is a form of Salary Sacrifice. So, now we guess you’re wondering... What is Salary Sacrificing? Salary Sacrifice, or salary packaging, is an arrangement between you and your employer where purchases are able to be made with your pre-tax salary. Salary sacrifice can be used for many purchases, depending on your industry and your employer they may include super, telephone bills, electronics, cars and more. Essentially, by taking part in a salary sacrificing or Novated Lease agreement, you are accessing a pretty nifty loophole where money that would have previously been spread across your taxable income and tax payments is now being substituted to repay a lease. Check out the infographic below to see what we mean.

Your pre-tax income is then used to make a loan repayment before having your tax deducted. See how this arrangement is pure genius? Money that you would have been spending anyway is now taken out of your pre-tax income. Still a little confused about pre-tax? Here’s how it works. What is Pre-Tax? Pre-tax is your income before tax is deducted. This is also referred to as your gross income. As an employee, without salary sacrificing or Novated Leases, the most you’ll see of your pre-tax income is a few figures on your payslip before your tax is deducted and the remainder deposited into your bank account. When you make use of pre-tax, you’re essentially able to spend money that is free of tax.

Here’s an example to show you the difference between Novated Leases and salary sacrificing compared with a regular wage system.

See how when you’re using pre-tax dollars to make lease payments, your overall taxable income reduces? This means that you are taxed less due to pre-tax payments being made. In this example, you would be left with $600 - You just put $50 back in your pocket for making payments for the exact same things. That’s $200 a month or $2400 per year…………..depending on your circumstances

The Risks

With a Novated Lease, there is always the risk that whether you lose or leave your job, the lease will still need to be repaid. While your next employer may be happy to take over the reigns, they also may not be due to unfamiliarity with the system.

Still a little baffled or want to discuss a more personalised situation? Give us a call on 5571 1222

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