Novated leases vs buying cars outright
We compare buying your car outright with a novated lease - with potentially surprising results.
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It can be tempting to think that owning a car outright is the best way to go – after all, you pay for your car and don’t have to take on a loan. Normally, a loan is avoided to sidestep costly interest rates and not pay more than the ticket price of the car. However, the largest cost in owning a car is actually depreciation – the loss in value of the car over time. And, whilst traditional car finance can be an inefficient alternative, novated leasing offers a very different option.
Your car as an investment: Crunching the numbers
The simple fact is that, unless you buy a collectable vehicle and put it in storage, your car is going to decrease in value, and probably significantly so. In fact, a car with a typical rate of depreciation is worth 58% of its initial value after three years, 49% after four years and 40% after five years. In other words, if you purchase a $60,000 vehicle, it could be worth $34,800 after 3 years, $29,400 after 4 years, or $24,000 after 5 years. That’s a lot of value lost – certainly it couldn’t be considered a wise investment. Add operating costs to this equation, and it’s a huge sum to pay for guaranteed negative return. If someone asked you for $60,000 now in exchange for $24,000 back in 5 years, would you do it? Not likely. But what’s the alternative? Is it always a negative investment to get a car? Not if you consider a novated lease.
How a novated lease compares
Structuring your “ownership” of a vehicle through a novated lease allows you to turn the situation into a positive outcome. A novated lease does this by allowing you to put money that you would otherwise pay in tax towards your car. That alone is a bit of a game changer. It’s like negative gearing an investment property – rather than the tax man getting your money, you use it to pay for and run your car. How does this work?
When you salary sacrifice your car, your employer makes your car payments using your full, pre-tax salary. Then they pay your tax obligations, but it’s on a lower amount; your taxable income is less, so you pay less tax. And this can be a saving of several thousand dollars a year across the life of your lease. On top of that, with a novated lease you can access wholesale pricing to get a big discount on the ticket price of your car, and you avoid paying GST on your vehicle and running costs.
A comparison: Novated lease vs buying outright
| Comparing a $60,000 car over 5 years: | Novated lease | vs | Ownership |
|---|---|---|---|
| Cost of car | $51,000 (with fleet pricing discount)* |
$60,000 | |
| Gross salary | $100,000 | $100,000 | |
| Claimable lease and running costs (pre-tax) | $16,336 | $0 | |
| Taxable income | $83,664 | $100,000 | |
| Income tax payable | $18,251 | $24,187 | |
| Net income | $65,413 | $75,813 | |
| Post tax loan and running costs | $0 | $17,568 | |
| GST paid | $0 | $1,600 | |
| After-tax cash available | $65,413 | $56,645 | |
| Savings per annum | $8,768 | $0 | |
| Savings over life of lease | $43,838 | $0 | |
| Loan residual | $15,411 | $0 | |
Novated lease savings |
$28,427 |
This example assumes the following:
$60,000 vehicle purchase price (divided over 5 years at $12,000 per year).
$464 per month running costs (fuel, insurance, rego, servicing & maintenance, tyres, etc). $5,568 per year.
*In this example we were able to achieve a 15% fleet pricing discount.
The example above is for an FBT exempt vehicle. FBT liability for personal use is not taken into account in this scenario.
The best of both worlds
Novated leasing can be the best of both worlds – the same benefits as owning a car without the huge upfront outlay (which you can put to better use elsewhere), plus a huge tax saving and none of the drawbacks of a loan. As you’ve no doubt worked out, a novated lease is very different to an old fashioned car loan, which adds interest costs onto an already negative situation. By contrast, a novated lease allows you to use the negative aspects of car ownership to obtain a positive tax outcome.
Owning your car on a novated lease
If it’s important to you to own your outright, it’s worth noting that at the end of your novated lease, you can. All you need to do is pay out the residual amount (the balance remaining on the lease) and it's yours. This residual is almost always lower than the market value of the car, so you can always sell your car instead and pocket any profit you’ve made on the sale, tax free. In fact, you have a range of options at the end of a novated lease.
You can:
Pay the residual, own the car outright and continue driving it; or
Pay the residual, sell the car and pocket any profit (tax free). You can then enter into a new novated lease if you’d like; or
Refinance the residual amount by entering into a new novated lease and continue driving the car.
If you’re worried that getting a novated lease would tie you to your current employer, what most people don’t know is that you can transfer your lease if you move jobs. It’s a simple process and you’d only need to ensure that your new employer offers novated leasing. If they don’t, we have a lot of experience guiding employers and helping them get set up, so feel free to suggest us to your employer.
Get in touch
If you’re still not sure whether you should buy outright or use a novated lease and want to chat through the pros and cons, feel free to give us a call on 1300 888 594 and we’ll be more than happy to run you through the process. We enjoy sharing our knowledge on novated leasing and are experts at finding the best value package for people’s unique situations. You can request a callback if you prefer, or send us a message and we’ll message you back.