Considering a novated lease for an electric vehicle to take advantage of the fringe benefits tax exemption? Read on before you make your decision.
When it comes to leasing a vehicle, the costs can often be steep, with insurance premiums being a significant factor. However, a lesser-known option known as a novated lease could potentially offer substantial savings, particularly for those on the top tax bracket.
In a recent example, simply asking about the interest rate for a novated lease led to a reduction of more than two percentage points off the rate, resulting in savings of over $1000 per year. Over the term of the lease, these potential benefits could run into tens of thousands of dollars.
What is a Novated Lease?
A novated lease is a three-way agreement between the employee, employer, and leasing company. Unlike traditional leasing arrangements, the finance for a novated lease is typically fixed for the term of the lease, unlike home loans.
However, it's important to note that leasing providers are not usually chosen by individuals but by employers who have deals with one or more leasing companies. In some cases, these leasing providers may outsource the financing component, which can lead to higher interest rates due to another entity getting involved and wanting their cut.
Tax Benefits of Novated Leases
One of the key advantages of novated leases is the tax benefits they offer. These benefits include payments for the car itself, registration, insurance, charging, servicing, and other eligible costs. For electric vehicles (EVs), there is even a fringe benefits tax exemption on zero emissions vehicles, providing additional savings.
However, it's crucial to remember that the insurance for a novated lease must be paid after the lease has been signed and finalized, not before. This can potentially cause a delay if you choose to source insurance separately and save thousands of dollars per year.
Considering the Costs and Benefits
While the tax benefits of novated leases are appealing, it's important to consider all options before making a decision. In one case, a novated lease had an interest rate of about 11.5%, well above the circa-7% you can achieve for a car loan.
Moreover, unlike home loans and some others, a novated lease typically has an interest rate fixed for the term of the lease. This means that even if the RBA rate reduces significantly during the term of your lease, you'll be stuck paying the higher rate.
Furthermore, employers may not allow employees to shop the entire market for leasing providers due to the need for the lease to run through the payroll department.
In conclusion, while novated leases offer potential savings, particularly in the form of tax benefits, it's essential to weigh these against the potentially higher interest rates and potential limitations in choice. As with any financial decision, careful consideration and research are key.
