How to Get A Novated Lease On A Used Car
You can get a novated lease on a used car or even on a car that you already own as long as it is less than seven years old.
Before you make this decision, work out if a novated lease will put you in a better financial position than a secured car loan.
How a Used Car Novated Lease Works
A novated lease on a used car works exactly the same as it does for a new car. You'll need to have the agreement of your employer, and the novated lease will have a balloon payment, as determined by the ATO, at the end of the loan term.
To set up a novated lease, you'll need:
- Agreement of your employer
- Evidence of PAYG income
- Sufficient surplus income to meet car loan repayments
- An idea of the type of car you'd like to buy
- Comprehensive car insurance
Changes to Novated Leasing Rules
In 2013 there were significant changes made to the structure of novated leasing or car purchase through salary packaging, affecting those earning less than $80,000 per year.
Some claim that changes to novated leasing contributed to the collapse of car manufacturing in Australia, as around 35% of novated leases were for locally made cars.
The new law added a requirement that the employee benefits from the novated lease would need to use the car in part for business purposes. This means keeping a logbook record for 12 weeks, recording business and personal use of the vehicle.
This isn't an onerous requirement, especially with GPS tracking in apps that can record your travel over a 12-week period and send it through to your accountant or employer.
To benefit from tax reductions, you'll need to use the car for business at least 20% of the time.
When the changes were announced, several leasing companies reduced their staff in anticipation of reduced novated lease volumes and cancellation of orders. 300 jobs were lost in the first week.
Charities, who rely on salary sacrificing to attract staff, were most affected.
What Does This Mean for You?
If you're considering a novated lease on a used car, the cost may outweigh the benefits. It's important to work out where you stand under the current novated leasing regulations, so check with your tax advisor before proceeding.
You can also seek advice from a lending specialist, who will be able to assess your credit profile and suggest the most cost-effective car buying option.
Weighing Up the Cost and Benefits
PAYG employees who choose to buy a car using a novated lease do so in order to reduce their taxable income, by using pre-tax income to purchase the car.
There are clear advantages if you are on a higher income, and you can claim a percentage of your running costs as work expenses.
- Salary sacrificing can cause you to drop a tax bracket and pay less tax.
- Running costs can be bundled into pre-tax payments
- A smart tax adviser will balance your pre-tax and post-tax contributions to minimise the Fringe Benefits Tax that you'll need to pay.
Nothing comes for free, so of course, there are disadvantages to novated leasing. You'll still have to pay tax.
- Fringe Benefits Tax aims to recover the tax you don't pay on your income that has been salary sacrificed to purchase the car.
- There's a large balloon payment, determined by the ATO due at the end of the loan term.
- You'll pay interest on the balloon amount.
Your Employer Affects Your Benefits
There are different rules for private companies and government employees. Private companies are required to pay company tax on any vehicle over the luxury car limit, and this becomes a company loan rather than a personal contract.
Government employees aren't affected by this company tax, so employees can lease a luxury car if they choose to do so.
What Type of Car Can You Buy?
A novated lease for a used car needs to be for a car that:
- Has carrying capacity of less than 1 tonne, such as utes
- Carries less than 11 people.
- Is less than seven years old.
If you're a government employee, you can also consider purchasing a luxury vehicle.
The age of the car that you purchase will determine the maximum term of your novated lease. If you're buying a car privately, you may need a vehicle inspection report before the lease will be formally approved.
Choosing the Right Car Finance Option
The best car finance option for you will depend on all of your current circumstances. To get the best long-term financial outcome you'll need to compare the options available to you.
To make this process easier, our lending specialists have extensive knowledge of the car finance products currently available in the market, including novated leases and other secured car loans, and can advise you on which options will put you financially in front.