The Disadvantages of a Novated Lease
Of course, like most things in life, there are some things you need to be aware of. To ensure that you are fully informed and thinking carefully about whether novated leasing is right for you, we cover the main disadvantages of novated leasing below, depending on your personal situation and what it is you are looking to achieve with a novated lease, they may or may not apply.
1.It’s your car so its your liability. Unlike a company car, you can’t just hand the car back or leave the car behind should you change employers. Though a novated lease agreement is essentially the employer agreeing to pay for the cost of a car on your behalf, costs of course recovered from your pay before tax, it is your liability so if you leave the car goes with you as do all the finance obligations. The good news is there are insurances to protect you from involuntary unemployment and a novated lease is portable. Should you leave one employer a novated lease can be easily transferred and reinstated with a new employer. So, with the right structure, this particular disadvantage can usually be overcome.
2.Potential end of lease residual shortfall risk. With the car being your liability so is the end of lease settlement. By law, a novated lease carries an end of lease residual, a bit like an end of lease balloon. This is an amount required to payout and settle the lease. The residual is a percentage of the vehicles capital value prescribed by the ATO. Regardless of of make or model the percentage is consistent with the term. Subject to make and model, kilometres and condition, the market value may not be sufficent to cover the payout, this shortfall is the employees liability. The good news, if the opposite is true and the car fetching more than the residual the employee picks up the difference tax free. The residual liability is something you need to be fully aware before entering a lease, the more kilometres you travel the greater the risk of a shortfall but the greater the tax savings as you will have sacrificed more. Again like Point 1) above, this disadvantage can be mitigated by taking out shortfall insurance at the outset (which is paid pre-tax and FBT free)
3. Mid lease payout. With a novated lease though there is no upfront cost for the employee but the lender recovers all interest and fees upfront. Should you elect to terminate a lease early the payout could be higher than you might expect. With this in mind it is a good idea to pay some attention to the term of your lease, for example if you think you might need a different car in 3 – 4 years it might not be in your best interest to take a 5 year lease term. This disadvantage is not unique to novated leases but any vehicle finance stucture.
4. The risk you might lose your job. If you lose your job, the repayments for the lease fall back onto you. This means you’ll be liable for all repayments. Of course, this is a risk you take with any kind of loan, but it’s something need to be aware of. There are insurances available to protect you from involuntary unemployment and a novated lease may also transferred to a new employer.
5. You have to get the boss to agree. A novated lease is a 3-way agreement between you the finance company and your employer. So even if you want one and a lender is happy to provide funding, you still need your boss to sign off. Thankfully when properly set up, with a reputable novated leasing company, it’s super simple for the employer. They even save some payroll tax but the biggest advantage is they get a happy employee saving money at no extra cost to them!
As always, it’s best to seek independent advice to make sure you’re fully informed on the pros and cons of a novated lease. Work out the savings on a calculator then consider insurances to cover the risks you’re most concerned about and add them into the mix. Contact us (or phone 1300 346 227) for a no-nonsense breakdown of what’s involved.
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