Novated leasing still viable?

[turbodewd]

Im into my 3rd year of a 4yr lease on an XR6T. I did my sums back in 2009 and found it to be worthwhile. But in May 2011 the Feds cracked down on this middleclass welfare (cant blame them) and have ramped up the FBT heaps.

My observation is that there is zero incentive for anyone to take out such a lease unless they earn $200,000+ and buy a petrol vehicle with at least moderate thirstyness (V8, turbo, etc).

This lease will be my last unless I choose to get an FBT exempt ute/pickup and declare that I will only use it to drive to and from work (bar very infrequent, minor other trips). Falcon ute or Ranger....sound okay but Im really a car guy.

[Mr Hardware]

Yes a novated lease is still viable. But it all depends on your tax bracket (you'd wanna be well into the 37c in the dollar as your marginal rate) and the usual conditions would still need to apply: you 'need' a new car, and you'd 'need' to get a loan for it if you weren't able to novated lease it.

If you can put up with even a slightly secondhand car and you can finance it yourself, then no, there's no real need for a novated lease.

[jpd80]

Originally Posted by turbodewd

Im into my 3rd year of a 4yr lease on an XR6T. I did my sums back in 2009 and found it to be worthwhile. But in May 2011 the Feds cracked down on this middleclass welfare (cant blame them) and have ramped up the FBT heaps.

My observation is that there is zero incentive for anyone to take out such a lease unless they earn $200,000+ and buy a petrol vehicle with at least moderate thirstyness (V8, turbo, etc).

This lease will be my last unless I choose to get an FBT exempt ute/pickup and declare that I will only use it to drive to and from work (bar very infrequent, minor other trips). Falcon ute or Ranger....sound okay but Im really a car guy.

FBT is being standardized across all ranges at 20% of total usage/costs.

Are you using the car to do mostly business related work with lots of travel or just to and from work?

If you're mostly work related and your business percentage is greater than 80%
then mayby its a case of going back to regular leasing with 221D in tax ect.
The stuff we used to do before novated leases.


Also don't forget the lock in of vehicle price for FBT calculations is for the first four years
so renegotiating a lease at three years won't help in bringing down the vehicle price component.
Or as you mentioned, get a NON-FBT vehicle....but be careful because mileage
has to be mostly work related with only minor incidental travel.
Not sure how govt would police that but something to keep in mind..

[blueoval]

Im planning to do a salary sacrifice arrangement with my company very soon.

I was told by my accountant that unless I actually needed to upgrade, it wouldnt be worth it. But he did state that if I did need a new car and had to finance it, it would be beneficial to use the business to claim the GST portion and claim the business expenses/depreciation on tax over a 4 year period.

You need to ask yourself, do you NEED to upgrade your car, do you NEED finance to purchase it, and can you AFFORD the salary sacrifice to fund the new vehicle? If you answered yes to the above, it could make sense to lease a car via salary sacrifice with the business you work for, and claim some tax benefits.

[turbodewd]

Well Id love to see someone show me some figures. Because Im currently in the 11% FBT bracket (aka 25,001km/yr) and the FBT is 3040 bucks/yr.

But even on a new XT Falcon now the FBT would now be a whopping 5600/yr! No matter what km u do. Wipes out any savings by effectively getting 37% off (38.5% if u inc Medicare levy) on your petrol/tires/servicing/etc

[jpd80]

Taxation greed is having unexpected collateral damage. People are walking away from leases
rather than pay FBT and car makers are seeing huge changes in the types of vehicle bought.

The government needs to wake up and understand that people that do lots of business km,
don't do the same proportion of private usage as someone doing a fraction of the mileage.

0-15,000 km should be 33%
15,000-25,000 should be 20%
25,000 - 40,000 should be 15%
over 40,000 should be 10%

If you think about it, that makes sense.

[BrisVegas]

I leased a $25k car under the old FBT system and it was worthwhile for me, even at my 5-figure income. I estimated 25,000km a year and paid the 20% FBT up front, but always made sure I did over the 25k to drop into the 11% bracket. The $2500 refund I got each year was nice little forced savings plan. At a flat rate of 20%, I think it's a ripoff and I couldn't justify now.

We did it when we had our 2nd kid and things were pretty tight. Our crappy old car only had one anchor point, so we needed something safer and reliable. It was tough finding the money each month for the lease, but at least when we were broke at the end of each pay we could always fill the car up with the fuel card. I actually bought the car at the end of the lease through an equity loan. It was in excellent condition, fully serviced and I'd put new tyres on it.

[jimmyxr6t04]

I pay a massive 10k per year in FBT, yet it still works out a little better off than having a loan.

This is my first lease, and i only opted to take it over 2 years incase i wanted out. Once this lease is up, i might just pay it out and keep the car for a while.

I think a novated lease is better than a personal loan. My previous car was costing me $550 (out of my take home pay) per fortnight in repayments and fuel alone. My leased car is costing about $600-650 per fortnight... So, for the extra $100-200 per pay, i get everything included. My tax per fortnight appears to have dropped from about $1000 to $600-700. Not to mention i'm driving a much newer/nicer car...

Spewing that FBT is such a high percentage though, as it certainly detracts from leasing!

[turbodewd]

Originally Posted by jimmyxr6t04

I pay a massive 10k per year in FBT, yet it still works out a little better off than having a loan.

This is my first lease, and i only opted to take it over 2 years incase i wanted out. Once this lease is up, i might just pay it out and keep the car for a while.

I think a novated lease is better than a personal loan. My previous car was costing me $550 (out of my take home pay) per fortnight in repayments and fuel alone. My leased car is costing about $600-650 per fortnight... So, for the extra $100-200 per pay, i get everything included. My tax per fortnight appears to have dropped from about $1000 to $600-700. Not to mention i'm driving a much newer/nicer car...

Spewing that FBT is such a high percentage though, as it certainly detracts from leasing!

10,000 in FBT per year?!?! Crikey, you would need massive tax savings to match that. Suppose you are in the 38.5% (medicare levy inc) tax bracket, u would have to have expenses on petrol, tires, insurance, rego, servicing of $26,000 to make it worthwhile.

Theres no way anyone spends 26,000 on tires, petrol, etc per year. Here are my yearly costs:

rego of 950
insurance 750
servicing 600
petrol 3700
tires 800 (1600 every 2 yrs)
interest 930

So all these costs are effectively the same as a tax deduction under a novated lease, i.e the govt will (in my case) pay for 38.5% of these costs. So these savings have to outweigh the FBT or youre losing out.

[jimmyxr6t04]

Originally Posted by turbodewd

10,000 in FBT per year?!?! Crikey, you would need massive tax savings to match that. Suppose you are in the 38.5% (medicare levy inc) tax bracket, u would have to have expenses on petrol, tires, insurance, rego, servicing of $26,000 to make it worthwhile.

Theres no way anyone spends 26,000 on tires, petrol, etc per year. Here are my yearly costs:

rego of 950
insurance 750
servicing 600
petrol 3700
tires 800 (1600 every 2 yrs)
interest 930

So all these costs are effectively the same as a tax deduction under a novated lease, i.e the govt will (in my case) pay for 38.5% of these costs. So these savings have to outweigh the FBT or youre losing out.

I'm hearing you, but i still think i'm slightly better off on a lease than a loan. A loan for a new car would have cost me $400-500 out of my net salary per fortnight, then i'd have to allow at least $200 per fortnight for fuel, plus other costs. The only advantage of the loan, is that after the 5 year period i would have owned the car... That's a bit of a problem though, as the longest i've kept any car in the past 9 years is 3 years, often i turn them over sooner.

The lease allows me a new car, i can hand it back at the end or buy/sell it. I'm not 100% certain that i'd take the lease option again, and in hindsight, i may have rushed into it... But i wanted to trial it for 2 years and see if i'd do it again.

It's weird how it works, and when i first saw the quote i thought no way... It worked out to be about $1000 per fortnight (gross)... In actual figures i only lose about $600 of my fortnightly pay.. A lot to pay for a car, but as i mentioned, i was already forking out $550 per fortnight on repayments and fuel alone on my previous car..

[2011G6E]

Yep, few guys getting caught out here as well...

Can't have people trying to save a little bit of the massive amount of taxes we all pay, can we?
The late Kerry Packer once famously said (after it was revealed he had managed to pay quite legally only $14,000 income tax in a year when he made many millions) "Anyone who doesn't use a clever accountant to minimise their tax is an idiot"...

[PridenJoy]

But if people are already in the 15-25k km bracket and are already paying 20% FBT, i guess the changes do not affect them much, as the amount of FBT they pay won't change if they want to re-lease at end of term.

[GT0132]

Originally Posted by PridenJoy

But if people are already in the 15-25k km bracket and are already paying 20% FBT, i guess the changes do not affect them much, as the amount of FBT they pay won't change if they want to re-lease at end of term.

If you enter into a lease after April 2014 the 20% rate will apply irrespective of distance travelled. For existing leases the sliding scale based on kms travelled still applies. For new leases startede between now and 31 March 2014 there is a phase in period.

[davez104]

My lease costs me ~$400 per week. That's for a $60,000 car doing 40,000kms per year. At my fuel consumption it works out to around $130 per week in fuel. Loan repayments on that figure over 6 years would be around $280 per week. Say what you like, as far as I'm concerned I'm already in front and that's not taking into account all the other included things, rego, insurance, services, tyres etc.

[Zenra]

Originally Posted by turbodewd

Well Id love to see someone show me some figures. Because Im currently in the 11% FBT bracket (aka 25,001km/yr) and the FBT is 3040 bucks/yr.

But even on a new XT Falcon now the FBT would now be a whopping 5600/yr! No matter what km u do. Wipes out any savings by effectively getting 37% off (38.5% if u inc Medicare levy) on your petrol/tires/servicing/etc

Your welcome to try our novated lease calculator, it will give you an idea if there is a benefit still there for you.

Even with the FBT increases, its a reduction in the saving, not wiping it out.

If the car costs $12,000 (all expenses ie finance, fuel etc excluding GST) a year to run, using a $80k salary...
Old calc $8,960 pre tax and $3,040 post tax = Take home $4,373.76 mth
New calc $6,400 pre tax and $5,600 post tax = Take home $4,293.70 mth

So the impact is approx $80 a month. But there is still a pre tax deduction for the vehicle of $484.97 making the novated lease a valid option to reduce your costs of owning a vehicle.

Our thoughts
Zenra

[Zenra]

Originally Posted by jpd80

Taxation greed is having unexpected collateral damage. People are walking away from leases
rather than pay FBT and car makers are seeing huge changes in the types of vehicle bought.

The government needs to wake up and understand that people that do lots of business km,
don't do the same proportion of private usage as someone doing a fraction of the mileage.

0-15,000 km should be 33%
15,000-25,000 should be 20%
25,000 - 40,000 should be 15%
over 40,000 should be 10%

If you think about it, that makes sense.

I think Europe has the right idea.
Take the cars CO2 emissions and * $X per 1000kms you travel.
That will allow people to choose their impact.

Pick a green car and drive high kms wont hurt the pocket or the environment too much.
Pick a non green car but only travel a small distance per year, pay more.
Pick a non green car and do high kms, ouch!!

Our thoughts
Zenra

[turbodewd]

Zenra,

to my eyes the viability of a novated lease vs a standard lease boils down to this:

1. A novated lease gets hit with FBT tax that I must pay. FBT is now a lot.
2. In order for the lease to be worthwhile all of the benefits of the novated lease must add up to a figure above that FBT or its a waste of time.

Correct?

If someone bought a $33,000 falcon today how much FBT woudl they pay on a 4 yr lease? [Where the falcon is 30,000 and 3000 of that is GST]

[blueoval]

Originally Posted by turbodewd

Zenra,

to my eyes the viability of a novated lease vs a standard lease boils down to this:

1. A novated lease gets hit with FBT tax that I must pay. FBT is now a lot.
2. In order for the lease to be worthwhile all of the benefits of the novated lease must add up to a figure above that FBT or its a waste of time.

Correct?

If someone bought a $33,000 falcon today how much FBT woudl they pay on a 4 yr lease? [Where the falcon is 30,000 and 3000 of that is GST]

I recently looked at a BMW for a similar amount of money. Here is what my accountant said regarding a 3 year lease as opposed to a 4 or 5 year lease.

Hi Shav

In relation to your options a 3 year Novated lease will create higher monthly repayments than a 4 or 5 year Novated lease.

You can minimize the impact to your cash flow by having a residual on the vehicle.

Below is an estimate of the cash flow impact to your salary and a rough tax benefit based on a Novated lease as follows:

- $33,000 Motor vehicle and on road costs.

- Novated lease term 3 years.

- Residual 30% ($9,900).

- Interest rate 8.5%. (This could be possibly lower)


Cash flow impact ($9,592.02) Annual

You will only need to Salary sacrifice the GST exclusive value of lease payment therefore your salary will reduce by $8,720.02 ($726.67 per month)

LEASE BENEFIT OUTLINED

Estimated tax benefit = $3,052 ($8,720 x 35%)

Tax benefit over lease = $9,156 (A)
Interest payable over lease term = $5,676 (B)
Overall net benefit over lease = $3,480 (A) + (B)

Overall benefit per anum per anum = $1,160

Please note the out of pocket expenses you will need to incur to offset the fringe benefits tax implication to receive the above benefit is $6,600 per year ($33,000 base rate x .20 statutarory fraction.)

Please bear in mind that residual on that BMW was grossly under valued but he did that to be safer and probably didnt do any research on the type of vehicle it was.

[Zenra]

Originally Posted by turbodewd

Zenra,

to my eyes the viability of a novated lease vs a standard lease boils down to this:

1. A novated lease gets hit with FBT tax that I must pay. FBT is now a lot.
2. In order for the lease to be worthwhile all of the benefits of the novated lease must add up to a figure above that FBT or its a waste of time.

Correct?

If someone bought a $33,000 falcon today how much FBT woudl they pay on a 4 yr lease? [Where the falcon is 30,000 and 3000 of that is GST]

1. Not totally correct, FBT is the tax employers must pay for providing an employee a Fringe Benefit, that has two options of settlement by the employer.
a) Employer pays the FBT and recover through the employees pre tax, OR
b) Employee contributes the amount equal to the FBT from post tax deductions and the employer has nil to pay.

Using method b means that you are not actually paying FBT but reducing the amount that you claim through pre tax. And the pretax amount is reducing your taxable position.

2. Lets make this a realish scenario
$34,800 car ($33k car inc GST, $800 rego and $1000 for stamp duty) for a 4 year term.
How many kms a year
What example salary
We can then do a example so that you can see the numbers and how they are created and also the difference between method a & b.

Regards
Zenra

[turbodewd]

Zenra

say the persons salary is 100,000, which puts 20,000 of his salary in the 37% bracket (38.5 really due to Medicare).

So how much FBT does the employee pay for each year in your example?

[Zenra]

Originally Posted by turbodewd

Zenra

say the persons salary is 100,000, which puts 20,000 of his salary in the 37% bracket (38.5 really due to Medicare).

So how much FBT does the employee pay for each year in your example?

And annual kms?

[IDT]

All due respect to those posting comments but Turbodewd be warned. Stay Away from Novated Leasing.

If you follow any calculations re tax or any other "Legally" related issues found on a forum you have rocks in your head. The only person you should be discussing this with is an accountant who has an intimate knowledge of your financial situation, knows the company you work for and can preferably negotiate on your behalf. There is a reason why Novated leases have become very unpopular.

[turbodewd]

Originally Posted by WAForce8

All due respect to those posting comments but Turbodewd be warned. Stay Away from Novated Leasing.

If you follow any calculations re tax or any other "Legally" related issues found on a forum you have rocks in your head. The only person you should be discussing this with is an accountant who has an intimate knowledge of your financial situation, knows the company you work for and can preferably negotiate on your behalf. There is a reason why Novated leases have become very unpopular.

WAForce8,

rest assured I am not seeking financial advice. I am a very intelligent fella who can indeed make informed decisions himself. Thanks for your concern of course.

In addition, FBT is part of Australian taxation law, the ways in which its calculated are public information and the formulas can be applied to a theoretical salary and a theoretical situation. My recent observation is that FBT is now very high and makes novated leasing barely viable to the vast majority. Happy to be proven wrong, but only facts and figures will prove anything.

[blueoval]

everyone's individual circumstances are different and what worked for some in the past, does not work for them now. That doesn't mean it still cannot work for others looking at it as an option. Just that the benefits now are less than they were.

For me, it will be my first lease car. My salary is projected to go up again by a reasonable margin by this time next year. I guess I am looking to see what benefits there are in the interim.

[GT0132]

If the operating costs (inlcuding lease payments) exceed the grossed up value of the net FBT (net being any FBT that remains after deducting any employee post tax contribution) then you're better off to salary package the car rather than do it after tax, the extent of which will depend on what tax bracket you're on and whether the salary reduction takes you into a much lower tax bracket.

However lease financing is still financing and in the overall hierarchy of most expensive to the least expensive methods of financing a car, leasing is less expensive than a chattel mortgage or a hire purchase, but more costly than a home loan redraw (provided you're disciplined enough to make the same repayments under a redraw as you would under a lease) or using your own money and foregoing the pidlding interest that banks pay and that you pay tax on.

The problem with leases, or any other form of financing involving balloon payments is that, because there is a balloon payment at the end of the term (some as much as 40% of original cost - paid after 4 yrs) and therefore lesser monthly payments, there is an inherent finance cost due to the lender having to wait till the end of the lease for the huge lump sum, whereas if that was paid progressively throughout the term the overall interest bill would be a lot lower.

All novated leases seem to be encourage is a "buy now pay later" mentality from those who really can't afford the car they lease. In my organisation there have been so many people over the years that wished they hadn't done a novated lease after the novelty of the new car wears off

[Zenra]

Originally Posted by WAForce8

All due respect to those posting comments but Turbodewd be warned. Stay Away from Novated Leasing.

If you follow any calculations re tax or any other "Legally" related issues found on a forum you have rocks in your head. The only person you should be discussing this with is an accountant who has an intimate knowledge of your financial situation, knows the company you work for and can preferably negotiate on your behalf. There is a reason why Novated leases have become very unpopular.

Hi WAForce8,

I agree that everyone should seek the advice of their accountant prior to major purchases like cars, houses, investment properties etc. (and the spouse too )

However being that a lot people have never heard of Novated lease, they gain the basic understanding through the web, forums etc like this, to then be able to ask question of their accountant etc.
And being that their accountant probably charges a small fortune, they don't want to walk in uneducated on the matter.

So for all of us to learn more, what are the reasons novated lease have become unpopular and that we should Quote : Stay Away from Novated Leasing.

Regards
Zenra

[KIWI-1]

Can Zenra please give some figures on a novated lease for a used vehicle?

[GT0132]

Originally Posted by turbodewd

Zenra

say the persons salary is 100,000, which puts 20,000 of his salary in the 37% bracket (38.5 really due to Medicare).

So how much FBT does the employee pay for each year in your example?

The FBT rate is not dependent on your salary , it is a fixed rate of 46.5%

If you have a 30,000 car and are on the 20% FBT rate your FBT cost is

($30,000 x 20% less post tax contribution) x 2.0647 x 46.5%

so if you contribute nothing in post tax then $30,000 x 20% x 2.0647 = $12,388 x 46.5% = $5,760 being the amount that comes out of your gross salary , pre-tax, to cover FBT

[turbodewd]

Originally Posted by GT0132

The FBT rate is not dependent on your salary , it is a fixed rate of 46.5%

If you have a 30,000 car and are on the 20% FBT rate your FBT cost is

($30,000 x 20% less post tax contribution) x 2.0647 x 46.5%

so if you contribute nothing in post tax then $30,000 x 20% x 2.0647 = $12,388 x 46.5% = $5,760 being the amount that comes out of your gross salary , pre-tax, to cover FBT

Perfect. Ok so in this example we see the FBT per year is 5760. However if a guy earns a 110,000 then he is in the 38.5% tax bracket for a lot of his income. So that FBT he cops per year is effectively a tax deduction so he really must pay 3542 every year.

Thats hefty tax!

[GT0132]

Originally Posted by turbodewd

Perfect. Ok so in this example we see the FBT per year is 5760. However if a guy earns a 110,000 then he is in the 38.5% tax bracket for a lot of his income. So that FBT he cops per year is effectively a tax deduction so he really must pay 3542 every year.

Thats hefty tax!

Correct because the FBT rate is indiscriminatory, those on a low marginal PAYG rates are worse off having non cash benefits than those on higher incomes. If you're on >$180,000 p.a your marginal tax rate is 46.5%, i.e the same as the FBT rate, so you're not so worse off and gain more through having a salary sacrifice arrangement in place.

Another way to look at it is, the lower your tax bracket, the less PAYG you save by having any pre tax salary deductions, like FBT, car running costs etc