Renewed car leases explained – Forbes Advisor Australia


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Novated lease is a tax-advantaged way to finance a new or used car. It means that an employee enters into a ‘salary sacrifice’ arrangement with his employer to lease the car. The employee is free from any obligation to purchase the car at the end of the lease term.

Repayments on the lease are deducted from the employee’s pre-tax salary, effectively reducing an individual’s taxable income and reducing income tax liability.

Unlike a standard car lease, a refurbished lease does not require the car to be used for business purposes at least half the time. Since most employees’ commutes don’t account for half of total usage, an extended lease provides an alternative lease.

With wages stagnating across Australia, a renewed lease appeals to many as it offers a tax break. It is also arguably more beneficial than a pay raise, as it does not cost the employer anything extra.

A person must be employed and receiving a salary to be eligible for a renewed lease, so of course this excludes self-employed sole proprietorships. However, a business owner can get a renewed lease if he pays himself a salary.

Related: How to find the best car insurance in Australia

How does it work?

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

It is essentially a three-part agreement between a financier, employer, and employee, and it requires entering into a lease with a financier or a bank, as well as a “salary sacrifice” arrangement with the person’s employer to cover repayments.

The employer then pays a refund to the financier on behalf of the employee, which is deducted from his pre-tax salary.
If the employee changes jobs, the car goes with them if the contract can be transferred to the new employer. The employee can also directly make his own payments.

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

An accountant can help you determine whether a renewed rental contract suits your personal circumstances. The cost effectiveness of an extended lease depends on an individual’s income, the cost of the car, and current running costs.

Different types of Novated Leasing explained

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

A fully arranged package includes the lease amount of the car plus any ongoing costs, such as fuel, maintenance, license plate, tires, insurance and roadside assistance in the event of a breakdown or accident.

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

An unmaintained plan is only the lease amount for the car and excludes all other costs associated with the vehicle, which the employee will have to pay.

Benefits of a new lease

The biggest benefit is paying less tax, which means you love your paycheck more and get access to a car.

An employee with a renewed lease contract does not have 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 financier, who can claim a pre-tax credit (that is, a levy paid by a company on purchased goods and services).

An extended lease allows the car to be used for personal purposes – there is no requirement that it be used solely for business purposes.

Lenders can be more lenient when agreeing to a new lease as it is considered less risky in terms of defaults as payments come automatically and from the employer.

A renewed lease contract is attractive to employers because when their employee leaves, he or she takes the car and lease obligations with them, and may be less effort than managing a company fleet. It can also reduce a company’s payroll tax liabilities because their reportable taxable salaries have decreased.

What are the disadvantages of an extended lease?

A renewed rental contract is bound to the employee, not the employer. If an employee quits and moves to another company, the new employer must agree to facilitate the agreement. Alternatively, the employee can make payments as in a standard lease. This is the default situation until a new employer is found.

How to get a new lease

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

A leasing company will be more lenient in its approval decisions for novated leases than 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 an extended lease, you typically have three options: pay the residual value to take possession of the car, refinance the residual value to continue using the car, or trade the car in for a newer model by entering into a new lease.

Frequently Asked Questions (FAQs)

Are new leases a good idea?

A renewed lease contract lowers taxable income and therefore often results in the employee paying less tax. For most people, that’s reason enough to appeal to the idea. However, talk to your accountant if you are unsure, as he or she can outline the tax implications.

How long does a renewed lease last?

A renovated lease usually runs for one to five years. When the lease ends, there are three options: trade the car in for a new one, refinance and keep it, or buy to own it.

With this last option, the ‘residual amount’ is paid, which is another term for the final payment. This fixed amount is calculated at the start of the rental agreement. A shorter lease term has a higher residual value, 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 remainder.

Who owns the car with a renewed lease contract?

During the lease term, the finance company owns the car. The employee only becomes the owner of the car if a balance payment is made at the end of the lease term, which means that he becomes the owner of the car. This is their choice.

Is car insurance included in a lease renovation?

Car insurance can be included in a renewed lease contract. This makes it cost effective as it reduces the amount of income a person has to pay.