Novated Leasing AMA

I work in Novated Leasing Sales for one of the NL providers in Australia, there's so many misconceptions here around Novated Leasing I want to straighten them out, I'm happy to answer any questions you have and run through the ins and outs of NL.

I've always believed that if i'm not selling a benefit to a customer, I'm not going to do it so let's break down a few things.

Novated leasing isn't free, your employer might offer it to you as a "benefit" but someone's paying for it, and that someone is you, you'll pay for it through the following:

a. Finance brokerage

b. Procurement fees

c. Insurance commissions (both comprehensive insurance and optional insurances.

d. Fortnightly Salary Packaging fees

e. Aftermarket Accessories (paint protection, dashcams, minor damage repair, etc) NOT dealer accessories.

Whenever i run through a new enquiry with a customer there are three key questions which determine whether a Novated Lease will be a good benefit for them:

a. Gross Annual Salary

b. KMs driven per year

c. Vehicle purchase price

These three questions form the basis for everything we do in Novated Leasing and it's essentially a balancing act between the three, i'll use some examples.

Say you're a teachers assistant on $40,000 a year looking to buy a $30,000 car over 5 years and you drive 10,000KMs a year, chances are a Novated Lease IS NOT FOR YOU. The reason is you're only paying $0.19 on the dollar for every dollar you earn over $18,900, therefore the amount of tax you save is not enough to overcome the interest rate charged on an NL.

Let's say you're a public servant earning $100,000 a year, driving 20,000KMs a year and looking to buy a $90,000 car, chances are an NL is NOT FOR YOU, the car you're purchasing is more expensive than the target market for NL and despite driving significantly more KMs you probably won't recoup the additional interest paid through the additional tax savings on your running costs.

Now let's say you're a nurse earning $80,000 a year, looking to buy a $35,000 car and driving 20,000KMs a year, this is the sweet spot, cheap car, high KMs, decent salary, at this point an NL might be better than paying cash, i'll break down why below:

Let's say you purchase a car for $35,000 paying cash, you pay no interest but you save no tax, you're $35,000 out of pocket which you'll need to recoup in some way or another, you've lost the use of that cash and invested it in a depreciating asset.

With an NL you might pay around $10,000 in interest, if you got a personal loan you might be lucky and get half that, but with an NL you save GST on the purchase (roughly $3,000) plus around 20% of your finance is paid pre-tax (over a 5 year term) and all the running costs, $100 worth of fuel outside of an NL is $100 out of pocket and you're paying GST, under an NL you pay for that fuel pre-tax (saving $32.50 on a salary between $45,000 and $120,000) and $10 in GST, leaving you with an out of pocket cost of $57.50, the accumulation of these ongoing savings is the primary benefit of leasing vs other finance, these savings apply to insurance, registration, servicing, tyres and petrol.

Now let's assume that your cumulative tax savings over the term of the lease are $15,000, that puts you $5000 better off than paying cash for the car, plus your cash is sitting happily in your savings account or on the ASX or whatever you want, it's not invested in a depreciating asset.

The insurances you can add on to an NL are hit and miss, honestly some have very little tangible benefit but there are some which are nice to have and some which might be a must have depending on your situation, the most important of these is a type of gap cover designed for NL, it covers any shortfall between the amount paid out by the comprehensive insurance and the amount owing on the NL finance, because NL is fixed term finance if the lease needs to be paid out early due to a write off you're paying out the entire remainder of the finance, this can be a shortfall of anywhere from $0 - $30,000 from what i've seen. If you can stomach a $10,000 - $30,000 out of pocket cost at the drop of a dime, leave it out but that's not the case for most people and if you can include an insurance to protect you against that (which is again paid for pre-tax) for around $5-$10 a fortnight depending on the value of the car, that's your call.

In my role i have actually told quite a few customers that NL isn't a suitable option for them, I'd much rather a customer leave happy with our interaction and well informed than confused and signing up for a product which doesn't benefit them, that does nobody any good in the long run, reputation damage to brand, no repeat customers, personal dissatisfaction, I'm not saying every person in sales is like that but that's the way I've always worked, it's a short term view of the world to work otherwise.

I want to talk briefly about the interest rate because it is a problem and it's something I've raised with management many times, the reason I've been given for the rate being higher than consumer finance is:

Novated Leasing is typically a harder type of finance to administer, on a lease the financier pays the dealership the full purchase price including the GST and then claims the GST back as a tax credit, this has inherent risks and a lot more admin than a normal consumer product.

NL finance is fixed for the term of the lease, this means that as rates go up and things change over time the lease doesn't change but the financiers are more risk averse when calculating rate than other consumer products.

At the end of the day I wanted to post this so that people aren't scared of Novated Leasing, it's just a product that works for a particular demographic of people, explore your options and if it works for you great, if not, so be it.

(NOTE I’VE SINCE FOUND OUT WHEN POSTING THIS TIP BELOW THAT MOST LEASING COMPANIES DO NOT SCALE THE RESIDUAL THE SAME WAY ON 13 MONTH AND 49 MONTH LEASES)

p.s. I'll throw out one more sneaky tip, if you're looking to absolutely maximise the tax savings on a Novated Lease and you've got cash in the bank and cashflow is not a concern, consider a 13 month lease.

On a 13 month lease you pay off the same percentage of the car as if you did a 2 year lease but you're only financing for 13 months, therefore paying less interest but squeezing out 2 years worth of tax savings, plus because it rolls into the second year of car ownership you can claim another round of insurance, registration and perhaps a major service pre-tax before your lease ends.

Also I'd encourage everyone to research the the new removal of FBT on EVs for Novated Leases, the federal government has removed FBT on Electric and Plugin Hybrid vehicles which means the entire lease including ALL the finance and all the running costs will come out pre-tax plus you'll save the GST on the purchase and running costs, as a result doing a Novated Lease on an Electric or Plugin Hybrid vehicle is an extremely attractive option especially for people on $180k+.

A smart option here is to consider a 49 month lease, you pay off the same amount of the car using entirely pre-tax funds as a 5 year lease (plus extra GST savings potentially) but pay 11 months' less interest.

Thank you for listening to my TED talk, I'm happy to answer any questions you have.