Novated Lease or Bank Loan for your new vehicle?

Novated Lease or Bank Loan for your new vehicle?

Are you looking to buy a car? Let’s look at the advantages and disadvantages to two possible options you may consider or which may be on offer to you to purchase a motor vehicle.

First let us consider a Novated Lease. A novated lease is when a business leases from a finance company, a vehicle on behalf of an employee. The contract, ‘or deed of novation’ is between a finance company, employer and employee.

Advantages

Lease payments for a novated lease will be made from your pre-tax income (salary sacrificing). When this happens, it reduces your taxable income, and in turn reduces overall taxation liability. The payments are usually lower than loan payment as you are paying for a portion of the cars full value, not the entire amount.

It allows for you to easily update the vehicle every few years at the completion of the lease. This is attractive to industries where perception play a key part in commercial viability or when a car is used on the road a lot. Depending on the lease arrangement, running costs and maintenance costs may be included which is attractive when the costs of running a car is factored into budgets.

Dis-Advantages

Some disadvantages of a novated lease, and perhaps one many consider when looking at entering into a novated lease for a motor vehicle is you will not own the car at the end of the lease. In addition to this, many employers will not allow salary packaging due to the administrative burden it incurs. If you stop working for your employer who you have the novated lease agreement with, and cease all employment, then all of the obligations for the car revert back to you personally and another employer may not wish to participate in the novated lease. This means you may end up paying the lease payment in after tax dollars.

The employer would have to pay Fringe Benefits Tax for personal use of the motor vehicle, this increasing the costs to the employer. Essentially with a novated lease, you guarantee the residual value of the vehicle at the end of the lease, even though the vehicle may be worth much less much quickly, and as a cars value tends to depreciate with time, instead of increase, is an important factor to consider.

With these in mind, another viable option to purchase a motor vehicle could be a personal or a bank loan.

A personal/bank loan is when you enter into a loan agreement directly with a financial institution.

Loan Advantages

Advantages of a personal or bank loan is you own the vehicle, have the discretion to make modifications to the vehicle and at the end of the term, the vehicle is owned outright by you.

With this type of loan option, you can sell the vehicle and settle the loan at any point in time (although penalties may apply depending on the type of loan initially entered in to). 

You can claim an income tax deduction provided you use the vehicle for work related purposes using one of the three methods. These methods include: cents per kilometre method, 12% of the original value method, one third of actual expenses method and logbook method.

 Loan Disadvantages

 Some loan disadvantages include: higher repayments costs (as you are paying the value of the entire original cost), you are responsible for the ongoing running and maintenance costs of the vehicle and it may not be tax deductible if you do not use the vehicle for work.

 So with a snapshot of these advantages and disadvantages of a Novated Lease versus a Bank Loan for the purchase of a Motor Vehicle, we hope this gives you some food for thought as you consider the best option for you. If you’d like to talk with us about the best options for your financial situation, or have any other questions about our full range of chartered accounting and business services we offer, you can contact our offices in Brisbane or the Gold Coast for expert accounting advice. 

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