Novated Leases and Depreciation: Impact on Your Finances

When considering vehicle financing options, novated leases often stand out due to their potential tax benefits and convenience. However, depreciation is an important factor significantly impacting a novated lease's overall cost and value. 

"Novated Leases and Depreciation: Understanding the Impact" explores how vehicle depreciation influences lease terms, residual values, and the financial implications for lessees.

What is a Novated Lease?

A novated lease is a car financing arrangement involving three key parties: the employee, the employer, and a finance company. In this setup, the employer agrees to make lease payments on behalf of the employee using pre-tax salary deductions, thus reducing the employee's taxable income and offering potential tax savings.

The process begins with the employee selecting a vehicle, after which the finance company purchases the car and leases it to the employer. The employer then "novates" the lease to the employee, meaning they take responsibility for the lease payments via salary packaging.

This agreement can cover various vehicle-related expenses, including fuel, maintenance, registration, and insurance, bundled into convenient monthly payments deducted from the employee's pre-tax income​.

How Depreciation Affects Car Value

Depreciation is the process by which a vehicle loses its value over time. Several factors contribute to depreciation, including the car's age, mileage, make and model, and overall condition.

On average, a new car loses about 20-30% of its value within the first year and approximately 15-20% each subsequent year​​.

Factors Influencing Depreciation:

• Age: Newer cars depreciate faster than older cars. The steepest depreciation occurs within the first few years of ownership.

• Mileage: Higher mileage typically results in higher depreciation, suggesting more wear and tear.

• Make and Model: Some brands hold their value better due to reliability and market demand.

• Condition: Well-maintained cars depreciate slower than those with visible wear and tear or mechanical issues.

Depreciation in Novated Leases

In the context of novated leases, depreciation directly impacts the residual value of the leased vehicle, which is the car's estimated market value at the end of the lease term.

Higher depreciation means a lower residual value, which can affect the lease payments and the employee's financial obligations at the end of the lease​.

Impact on Lease Payments:

• Residual Value: The initial and residual values are key in calculating lease payments. Higher depreciation lowers the residual value, potentially increasing monthly payments to cover the difference.

• Tax Savings: While depreciation does not directly affect tax savings, it influences the overall cost of the lease, impacting the employee's disposable income.

Financial Implications of Depreciation in Novated Leases

Depreciation affects various financial aspects of novated leases:

• Total Cost: Depreciation impacts the total cost of the lease. A car that depreciates quickly will have a lower residual value, increasing the amount paid over the lease term.

• Tax Savings: Payments are made from pre-tax income, which can reduce taxable income. However, a higher depreciation rate might necessitate higher lease payments, affecting the net tax benefit.

• Residual Obligations: At the end of the lease, the employee might face a balloon payment to cover the residual value. If the car's market value is less than expected due to high depreciation, this could be financially burdensome​.

Tips for Managing Depreciation in Novated Leases

Managing depreciation effectively can help minimise financial impacts and optimise the benefits of a novated lease:

• Choose the Right Vehicle: Opt for cars that hold their value well. Research and select makes and models with lower depreciation rates.

• Regular Maintenance: Keeping the vehicle in good condition can slow depreciation. Regular servicing and prompt repairs are essential.

• Negotiate Lease Terms: Understand the lease terms, especially the residual value. Negotiate terms that reflect realistic depreciation rates.

• Consider Used Vehicles: Leasing a used car with a novated lease can be viable. Used cars have already undergone significant depreciation, potentially offering better value.

• Document Business Use: Maintain accurate business versus personal use records to optimise FBT calculations under the Operating Cost Method.

Ready to maximise your financial benefits with a novated lease? Contact Novated Finance Australia today to explore your options and find the best car leasing solution. Our experts help you save on taxes and manage depreciation effectively.

Frequently Asked Question

• How does a novated lease impact my taxable income?

  A novated lease can reduce your taxable income because lease payments are made from your pre-tax salary, potentially lowering your overall tax liability.

• What happens to a novated lease if I change jobs?

  If you change jobs, you can transfer your novated lease to your new employer if they offer novated leasing. Otherwise, you may need to take over the payments, losing associated tax benefits.

• Is it better to lease a new or used car with a novated lease?

  Leasing a used car can be advantageous as it has already undergone significant depreciation, potentially resulting in lower lease payments than a new car.

• Can I include maintenance and running costs in a novated lease?

  Yes, a fully maintained novated lease can include running costs like fuel, maintenance, and insurance bundled into the monthly lease payments deducted from your salary.

• How can I effectively compare different novated lease providers?

  To compare providers, evaluate their interest rates, fees, customer service, and lease terms' flexibility. Look for reviews and testimonials from other customers, and consider seeking advice from a financial advisor to find the most cost-effective and reliable provider.