Pros and Cons of novated leasing:
Is a novated lease worth it?
The benefits associated with novated leasing are significant. Employees can expect to receive massive savings on their income tax, massive savings on GST and very competitive vehicle pricing due to the buying power of a fleet management company. These are just a few of the real benefits a novated lease can provide for an employee looking to purchase a vehicle.
Employers can also benefit from offering their employees novated leasing. Novated leasing is a great staff incentive and retention tool. An employer can increase their employee’s disposable income and buying power due to the reduction of income tax payable. Taxable income related expenses such as payroll tax and workcover premiums may also be reduced due to the reduction in an employee’s taxable salary.
The benefits of novated leasing are real and substantial. So what are the cons of novated leasing?
We hear it all the time; “it sounds too good to be true”. Whilst there are many benefits, there is also an element of risk involved. The biggest risk associated with novated leasing is the potential shortfall between the vehicle’s value and the payout figure if the contract were to be terminated at any time throughout the lease term. Most financier’s use either the ‘rule of 78’ or the ‘discounted cash flow method’ to determine an early payout figure. Without going into too much detail, this basically means that the payout figure could be substantially more than the vehicle’s market value during the lease term. The “gap” between the payout figure and the market value of the vehicle will reduce over the length of the lease. This presents a risk if the vehicle was to be written off or stolen in which the contract may need to be paid out. The potential shortfall between what is owing on the finance and what your comprehensive insurer pays out can be a substantial amount, especially if it were to happen in the first half of the lease term. Thankfully we can mitigate this risk by taking out a Gap insurance policy or opting for a comprehensive insurance policy that includes new for old replacement.
This also presents an issue for driver’s wishing to upgrade their vehicle during the lease term. The same payout principles apply and unless you were trying to upgrade towards the end of the term, it may not be financially viable.
With this in mind, a novated lease can be a great way to finance and maintain a vehicle with the extra benefit of reducing your tax. Please consult your own independent financial advice before moving forward.