Does Novated Lease Affect Superannuation?

Yes, a novated lease can affect your superannuation in several ways. Understanding these implications is crucial to ensuring that your retirement savings aren’t negatively impacted while you enjoy the benefits of a novated lease. This blog will walk you through the key considerations around superannuation and novated leases, how salary sacrifice affects your super contributions, and the steps you can take to protect your retirement savings.

How Novated Lease Impacts Superannuation Contributions

A novated lease is a form of salary sacrifice, where a portion of your pre-tax income is redirected to cover the costs of the car lease. While this offers the advantage of reducing your taxable income and increasing your take-home pay, it can also impact your superannuation. Here’s how:

1. Salary Sacrifice Contributions

When you choose a novated lease, the portion of your income that goes towards the lease is salary sacrificed. This means that while your taxable income is reduced, so too is the amount that contributes to your superannuation. Super contributions are typically calculated based on your gross salary, but because salary-sacrificed amounts like those used for a novated lease aren’t included in your gross salary, the employer’s contributions to your superannuation will also be lower.

2. Employer Contributions

Employers are required to contribute a percentage of your earnings to superannuation through the Superannuation Guarantee (SG). However, salary-sacrificed amounts, such as those used for a novated lease, are not counted as part of your ordinary time earnings (OTE). As a result, your employer does not have to make super contributions on the portion of your salary that is used for the novated lease.

For example, if your salary is $80,000 and you sacrifice $10,000 for a novated lease, your employer will only make super contributions on the $70,000 (your remaining OTE), rather than the full $80,000.

This reduction in employer contributions could result in your overall superannuation savings being lower than expected, especially if a large portion of your salary is sacrificed for a novated lease.

3. Impact on Your Super Balance

The reduced employer contributions can add up over time and have a significant impact on your superannuation balance, particularly if you’re relying on your employer’s contributions for the majority of your retirement savings.

Potential Impact on Superannuation Insurance

Many superannuation funds offer insurance benefits, including life insurance and income protection. These insurance benefits are typically based on your salary. Since a novated lease reduces your taxable income, your superannuation insurance may also be impacted.

• Life Insurance: If your salary is lower due to salary sacrifice, the amount of life insurance coverage you are entitled to through your super fund may also be reduced.

• Income Protection: Similarly, if your salary is lower, the income protection insurance may cover a smaller portion of your income, leaving you with less financial security in the event of an illness or injury.

If insurance benefits are important to you, it’s worth reviewing your superannuation insurance coverage to ensure that it remains adequate in light of your salary sacrifice arrangement.

How to Mitigate the Impact of a Novated Lease on Superannuation

While a novated lease can affect your superannuation contributions and insurance, there are steps you can take to minimise the impact on your retirement savings:

1. Make Voluntary Contributions to Your Super

One of the easiest ways to make up for the reduced employer super contributions is to make voluntary post-tax contributions to your super. These contributions will help boost your super balance and ensure that you’re putting aside enough for your retirement.

• Salary Sacrifice Additional Amounts: In some cases, you may be able to salary sacrifice additional funds to your superannuation to counterbalance the reduction caused by the novated lease.

• Voluntary After-Tax Contributions: Alternatively, you can make additional contributions from your after-tax income. Your super fund may offer a co-contribution scheme, which can further boost your savings.

2. Review Your Superannuation Insurance

It’s essential to review your superannuation insurance coverage regularly. If your salary is affected by a novated lease, make sure your insurance coverage still meets your needs. You may want to consider increasing your coverage if it has been impacted by a lower salary.

3. Consult a Financial Advisor

A financial advisor can help you navigate the potential impacts of a novated lease on your superannuation and provide advice on how to best manage your superannuation to ensure you’re on track for retirement.

4. Monitor Your Superannuation Contributions

Make it a habit to check your superannuation statements regularly. This allows you to monitor the amount of superannuation being contributed and assess whether adjustments are needed. If you notice a drop in your employer contributions, it may be time to make voluntary contributions or seek further advice.

Conclusion

While a novated lease offers many benefits, including tax savings and reduced taxable income, it can have an impact on your superannuation contributions and insurance benefits. The portion of your salary used for the novated lease is salary sacrificed, which reduces your gross salary and, in turn, the superannuation contributions your employer makes. To mitigate this, consider making voluntary contributions to your super, reviewing your insurance coverage, and consulting with a financial advisor to ensure your retirement savings aren’t negatively affected.

Want to learn more about how a novated lease could impact your super? Contact us today for tailored advice on how to protect your retirement savings while benefiting from a novated lease.

FAQs

• Does a novated lease affect my superannuation?

  Yes, because you are salary sacrificing to pay for your novated lease, your employer’s contributions to your superannuation will be lower, as the salary sacrifice amount is not considered part of your ordinary time earnings.

• How can I mitigate the impact of a novated lease on my super?

  You can make voluntary post-tax contributions to your super to make up for the reduced employer contributions. Additionally, you can review and adjust your superannuation insurance to ensure it meets your needs.

• Will a novated lease impact my superannuation insurance?

  Yes, as your salary is reduced due to salary sacrifice, the amount of superannuation insurance coverage you’re entitled to may also decrease. It’s a good idea to review your coverage and adjust it if needed.

• Can I sacrifice additional amounts of my salary to my super?

  Yes, you can opt to salary sacrifice additional funds into your superannuation to help offset the impact of the reduced contributions caused by your novated lease.

• Should I consult a financial advisor before entering a novated lease?

  It’s highly recommended to consult a financial advisor to understand the full impact of a novated lease on your superannuation and develop strategies to manage your retirement savings effectively.