Understanding the Annual Budget Impact on a Novated Lease

Understanding the impact of the annual budget on a novated lease is crucial for anyone considering this popular car financing option. Novated leasing offers potential tax benefits, streamlined vehicle expenses, and the allure of driving a new car every few years. However, it's important to recognise how these leases affect your annual budget.

This guide aims to help you make informed decisions for novated leasing that align with your financial goals. Whether you're an employee looking to optimise your salary packaging or an employer seeking attractive benefits, understanding these budgetary implications is key to maximising the advantages of novated leasing.

Annual Budget Considerations

Salary Packaging and Tax Implications

The primary advantage of a novated lease is the reduction of taxable income through salary packaging. Employees can lower their tax liability by using pre-tax dollars to pay for the lease, increasing their disposable income. This tax benefit is one of the significant annual budget impacts of novated leasing.

Key Points:

• Pre-Tax Salary Deductions: Lease payments are made from pre-tax salary, reducing the overall taxable income.

• Increased Disposable Income: Lower taxable income means employees take home more earnings.

Fringe Benefits Tax (FBT)

Employers must consider Fringe Benefits Tax (FBT) when offering novated leases. FBT is a tax on benefits provided to employees in place of salary. However, employers can reduce FBT liability by structuring the novated lease correctly, such as through the Employee Contribution Method (ECM), where employees make post-tax contributions towards their vehicle expenses.

Strategies to Manage FBT:

• Employee Contribution Method (ECM): Employees make post-tax contributions to offset FBT, lowering the employer's FBT liability.

• Statutory Formula Method: Calculates FBT based on the vehicle's cost and a set percentage, regardless of actual usage.

• Operating Cost Method: The actual costs of operating the vehicle and the percentage of private use are used to calculate FBT​​.

Cost Components in a Novated Lease

While novated leases can simplify vehicle financing, they come with initial costs that must be planned for in the annual budget.

Upfront Costs

• Initial Fees: These can include setup fees for the lease agreement and any initial payment required by the finance company.

• Comparison with Traditional Loans: Unlike traditional loans that may require a significant down payment, novated leases often have lower upfront costs but spread the expenses over the lease term​​.

Running Costs

A significant advantage of novated leasing is the inclusion of running costs within the lease payments, providing predictable and manageable car expenses.

Included Costs:

• Fuel: Many novated leases include fuel costs managed through a fuel card system.

• Maintenance: Regular maintenance and servicing are typically covered, ensuring the vehicle remains in good condition.

• Insurance and Registration: Comprehensive insurance and vehicle registration fees are included, protecting the vehicle and ensuring legal compliance​.

Balloon Payments

Employees must pay full balloon payments at the end of the lease term.

Financial Benefits

Tax Savings

One of the most appealing aspects of novated leasing is the potential for tax savings. Employees reduce their taxable income by making lease payments from pre-tax salary, which can result in significant tax savings over the lease term.

Fleet Discounts 

Employers and employees can benefit from fleet discounts provided by dealerships to lease providers. These discounts make novated leasing an attractive financial option.

Advantage:

• Fleet Pricing: Access to lower prices typically reserved for corporate buyers.

Potential Financial Drawbacks

Loss of Job Security

A significant risk associated with novated leasing is the financial obligation if the employee loses their job or changes employment.

Considerations:

• Job Loss: Employees who lose their jobs are responsible for continuing lease payments or terminating the lease, which can incur fees and financial penalties.

• Employer Change: Moving to a new employer who does not support novated leasing can result in the employee having to take over the lease payments personally​.

Administrative and Interest Costs

While novated leases offer various benefits, they can also have higher interest rates and administrative fees than traditional car loans.

Costs:

• Higher Interest Rates: Novated leases may have higher interest rates, increasing the overall cost of the lease.

• Administrative Fees: Fees for managing the lease and associated services are included in the lease payments, adding to the total cost​.

Practical Tips for Managing Budget Implications

Regular Review and Adjustment

To maximise the benefits of novated leasing, employees should regularly review their lease terms and running costs to ensure they align with their financial goals.

Steps:

• Annual Review: Assess the lease agreement and running costs annually to adjust salary packaging as needed.

• Financial Planning: Plan for end-of-lease options, including saving for potential balloon payments​​.

Utilising Lease Calculators

Online novated lease calculators can help employees estimate their savings and costs, providing valuable insights for financial planning.

• Estimate Savings: Input salary, lease term, and vehicle details to estimate tax savings and overall costs.

• Plan Budget: Use the calculator results to plan the annual budget, ensuring all costs are accounted for​.

Ready to maximise your savings with a novated lease? Contact Novated Finance Australia today for expert advice and tailored novated leasing solutions. Let's simplify your vehicle expenses and boost your financial benefits!

Frequently Asked Question

• How does a novated lease impact my annual budget?

  A novated lease can lower your taxable income through salary packaging, potentially increasing your disposable income and providing tax savings on vehicle expenses.

• What are the financial risks of a novated lease?

  Financial risks include higher interest rates, administrative fees, and the responsibility for lease payments if you change jobs or lose employment.

• Are running costs included in a novated lease?

  Yes, most novated leases include running costs such as fuel, maintenance, registration, and insurance, which are consolidated into regular pre-tax salary deductions.

• Can I save money with a novated lease?

  Yes, you can save money through tax benefits and access to fleet discounts, which can reduce overall costs.