Renewal Car Leases Explained - Forbes Advisor Australia

Renewal Car Leases Explained – Forbes Advisor Australia

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A novated lease is a tax-effective way to finance a new or used car. It involves an employee entering into a “salary sacrifice” agreement with their employer to lease the car. The employee is released from any obligation to purchase the car at the end of the lease period.

Lease refunds are deducted from the employee’s pre-tax wages, effectively reducing a person’s taxable income and requiring less income tax to be paid.

Unlike a standard car lease, a renewed lease does not require that the car be used for at least half of the time for business purposes. Since most employees’ commute to work would not account for half of their total usage, a renewed lease provides an alternative lease arrangement.

With wages stagnant across Australia, a renewed lease appeals to many because it provides a tax break. It’s also arguably more obtainable than a raise, because it doesn’t cost the employer anything extra.

A person must be employed and paid to qualify for a novated lease, so this naturally excludes self-employed independent traders. However, a business owner can have a novated lease if he pays himself a salary.

Related: How to find the best car insurance in Australia

How does it work?

A nova lease is a way to finance a new or used car through a salary package. Refunds are made from an individual’s pre-tax wages with the agreement of the employer.

It is essentially a three-way deal between a financier, an employer and an employee, and requires entering into a lease with a financial provider or bank, as well as a ‘salary sacrifice’ agreement with the person’s employer to cover the costs. refunds.

The employer then makes reimbursements to the financial provider on the employee’s behalf, which is taken out of their pre-tax pay.
If the employee changes jobs, the car goes with him if the agreement can be transferred to the new employer. The employee can also make their own payments directly.

Here’s how it works: An employee with an annual pre-tax salary of $70,000 whose novated lease payments are $10,000 per year will have their taxable income reduced to $60,000. That reduces the total amount of income tax paid.

An accountant can help you decide if a novated lease is right for your personal circumstances. The profitability of a renewed lease depends on the person’s income, the cost of the car, and ongoing running costs.

Explanation of the different types of renewed lease

There are two main types of novated leases: fully maintained Y not maintained.

A full maintenance agreement includes the rental amount of the car plus any ongoing costs such as fuel, service, registration, tires, insurance, and roadside assistance in the event of a breakdown or accident.

This creates a single payment that bundles all vehicle expenses into one payment, which some prefer.

A non-maintained agreement is only the lease amount of the car and excludes all other costs associated with the vehicle, which the employee will need to finance.

Benefits of a renewed lease

The biggest benefit is paying less in taxes, which means keeping more of your salary and having access to a car.

An employee with a renewed lease does not need to pay GST on the running costs of his car. The GST that would normally be paid on the purchase price is covered by the finance provider, who can claim a down payment tax credit (which is a levy paid by a business on the goods and services purchased).

With a renewed lease, the car can be used for personal purposes; there are no requirements for it to be used exclusively for business.

Lenders may be more lenient in accepting a renewed lease, because it is perceived as less risky in terms of defaults, since payments come automatically and from the employer.

A novated lease is attractive to employers because if your employee leaves, he or she will take the car and lease obligations with them, and it can be less effort than managing a fleet of company cars. It can also reduce a company’s payroll tax liability, because its reportable taxable wages have decreased.

What are the disadvantages of a renewed lease?

A novated lease is bound to the employee, not the employer. If an employee resigns and moves to another company, the new employer must agree to facilitate the agreement. Alternatively, the employee can make payments as he would under a standard lease. This will be the default situation until a new employer is found.

How to get a renewed lease

The employer must agree to enter into a renewed lease with his employee.

A leasing company will be more lenient in its approval decisions for new leases than it would be for a standard lease. The risk of default is considered lower, because the payments come from the employer before the salary is paid.

What happens at the end of the lease?

At the end of a renewed lease, you generally have three options: pay the residual value to take possession of the car, refinance the residual value to continue using the car, or trade in the car for a newer model when you enter into a new lease. .

Frequently Asked Questions (FAQs)

Are novated leases good?

A novated lease reduces taxable income and therefore often results in the employee paying less tax. For most people, that’s reason enough for the idea to be attractive. However, talk to your accountant if he or she isn’t sure, as he or she will be able to describe the tax implications.

How long does a renewed lease last?

A renewed lease generally lasts from one to five years. When the lease ends, there are three options: trade in the vehicle for a new one, refinance it and keep it, or buy it for possession.

This last option involves paying the ‘residual’, which is another term for the final payment. This flat rate amount is calculated at the beginning of the lease. A short-term lease will have a higher residual, because a newer car is a more expensive car. For example, a one-year lease may have 65% of the car’s total value as a residual.

Who owns the car in a nova lease?

Throughout the lease, the finance company owns the car. The employee will only own the car if at the end of the lease period a residual payment is made that allows him to take possession of the car. Doing so is his choice.

Does a renewed lease include auto insurance?

Auto insurance can be included in a renewed lease. This makes it profitable because it reduces the amount of income a person must pay.

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