New Vehicle Purchase: Novated Lease vs Bank Loan

If you are considering purchasing a new car, it might be worth your while to learn about the pros and cons of two possible ways you can own your dream ride.

Novated Lease

This involves a business, on behalf of an employee, leases a vehicle from a finance company. The deed of novation, or contract, is between the employer/ employee and the finance company.

Novated Lease Pros

Lease payments are made through salary sacrificing, which means deducting the sum from your pre-tax income. In this situation, your taxable income is reduced, resulting in your total taxation liability being reduced as well. Since you are paying for a share of the car’s full value, not the whole amount, your payments are lower than loan payments.

With a Novated Lease, you can easily upgrade your car every few years after you have finished the lease. Industries that utilise perception to achieve commercial viability or those that rely on vehicles a lot will find this option attractive. Depending on the terms of the lease, maintenance costs and running costs may be added, which is advantageous when a car’s running costs are made a part of the budget.

Novated Lease Cons

One of the disadvantages of entering into a novated lease is that you will not be the owner of the car at the expiration of the lease. Moreover, a lot of companies will forbid salary packaging because of the administrative costs that it associated with. If you terminate your employment with the company that you have entered into a novated lease with, you have to personally take care of all obligations and your new employer may refuse to get involved in the novated lease. As a result, you might be paying the remaining lease payments in after tax dollars.

For personally using the motor vehicle, the employee would be obligated to pay Fringe Benefits Tax. This ups the cost to the business owner. In effect, you guarantee the vehicle’s residual value at the expiration of a novated lease, despite the fact that the vehicle’s value would depreciate much faster. And you also have to consider that the value of cars drops over time, instead of rise.

Loan

You can consider another option for buying a motor vehicle: a personal or a bank loan. This option entails entering into a loan agreement personally with a finance company.

Loan Pros

You own the vehicle when you take a personal or bank loan. Moreover, you can make changes to the vehicle, and you own the vehicle outright at the completion of the loan agreement.

This type of loan option allows you to sell the vehicle and clear up the loan at any time (of course, you may incur penalties depending on what type of loan you’ve chosen).

You are entitled to an income tax deduction, as long as utilise the vehicle for work using one of these three methods: cents per kilometre method, 12 per cent of the original value method, one third of actual expenses method and logbook method.

Loan Cons

With a bank or personal loan, the repayment costs are higher, you take care of the vehicle’s ongoing maintenance and running expenses, and you may not be able to claim tax deductions if the vehicle’s use is not work related.

By giving you an idea of the pros and cons of a Novated Lease vs a Bank Loan for the procurement of a vehicle, we hope to help you decide the best option for you. If you would like to seek our advice about the best options for your particular financial situation, or if you have any enquiries about our portfolio of chartered accounting and business services, please contact PJS Accountants.