What is a Novated Lease?
The costs of running a car can sometimes be too much. Things you might not even think about when you’re looking at buying or leasing a car to suit your budget all add to the cost – petrol, tyres, repairs, regular servicing. If the thought of all the extra costs above the actual price of the car is causing you stress, novated leasing might be the answer you didn’t even know you were looking for.
We cover the basics of novated leasing including what exactly novated leasing means, how it works and what it involves.
What Exactly is a Novated Lease?
A novated lease is a great car leasing option. It essentially involves a three-way agreement between yourself, your employer and a financier. Your employer is responsible for making repayments directly to the finance company using your pre-tax income. This doesn’t mean your employer is providing you with a car over and above your income. You’ll be paying for your car, just with money from your salary before you receive it. This is known as Salary Sacrificing. Be aware that not all employers offer Salary Sacrificing so be sure to check with your employer before making any arrangements.
How Does It Work
A finance company buys a car on your behalf, which you pay back (via your employer) a set amount each month for the set term. This term could be 12 months or 60, or anywhere in between.
You’ll sign a Finance Lease which is the contract governing the terms of the lease. This will cover important things like:
- The length of the agreement
- The repayment sum (and whether you pay this monthly or fortnightly)
- The residual value
Once the term is over you can purchase the car for the residual value. You have the choice of paying out the residual value, refinancing it or selling it. If you choose to sell and you make a profit you’re entitled to keep the profit tax free.
What Do Repayments Cover?
The best thing about a novated lease is that repayments cover petrol, servicing, repairs and maintenance, insurance and registration. This means that instead of paying for your car as well paying for petrol every time you fill up and for servicing, repairs, insurance and registration when the need arises, you’ll regularly pay one sum that covers it all.
While your costs would otherwise increase unpredictably over time (no one plans to get a punctured tyre), with a novated lease you can take comfort in the fact that you know exactly how much you’ll be paying over a specified period of time.
So your overall costs could look something like this:
The only things repayments do not cover are tolls, fines and anything extra you add to your car (like that fluffy dice hanging from your rear view mirror).
Who Owns the Car?
You do. If you change jobs, you’re entitled to take the car with you. If, for whatever reason, you no longer work with your employer then the novation agreement will end and the obligation to meet payments is transferred back to you. You then have the option of entering into a new novation agreement with your new employer should you get a new job.
Your Step-by-Step Guide to a Novated Lease:
1. Find out whether your employer offers salary packaging and novated leases.
2. Conduct some research or contact us to find out what your options are.
3. Seek some independent advice from an accountant or financier who can help you decide whether which car leasing option is best for you.
4. Make sure you fully understand the implications of the novated lease and test out scenarios on a novated lease calculator.
5. Choose your vehicle.
6. Choose a financier if one is not already in place.
7. Once finance is approved, a Deed of Novation will be prepared.
8. Sign the Deed of Novation with your employer and the finance provider.
9. You’ll then receive your new car! Ready to hit the road with a full tank of petrol.
10. Your employer pays the lease repayments on your behalf from your pre-tax salary.
11. Should your employment end, the responsibility to meet repayments revert to you.
12. At the end of the lease term you have the option to purchase the vehicle for the residual value, refinance it or sell.
So as you can see, novated leasing is a great car leasing option. It’s relatively straightforward and there are many benefits involved both for you and your employer. To find out more, or to enquire about your options, contact Private Fleet today.