Buying a new car can be exciting. But while you are deciding on what car to buy you should be thinking about how you will pay for it. A popular way to finance a car purchase for APS employees is salary packaging and the use of a novated lease.
Salary Packaging and Novated Leasing
A novated lease means your employer pays for your car under a lease and all the operating costs such as insurance, registration, fuel and maintenance. The employer will deduct a before and after-tax amount from fortnightly for this expense.
The Benefits of Novated Leasing
The benefits of a novated lease lie in the tax savings they can provide. Some of the benefits novated lease and salary packaging companies use when promoting their services include:
- You will save on the purchase cost of the vehicle because there is no GST on the purchase price. This can provide a real benefit as most APS employees do not operate a business and have an Australian Business Number (ABN) which is required to claim the GST back. However, if you have a partner with their own business and ABN consider options available to them.
- You will save additionally on the purchase price of a vehicle due to purchasing power of the salary packaging or lease company. This can often be the case but it is always worthwhile checking.
- Tax savings. Even if you do not use your vehicle for work purposes then legitimate tax savings cans still be achieved.
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Novated Lease Considerations
Before entering into a novated lease, you should consider the following:
- Obtain a novated lease quote and then confirm the price quoted for the vehicle is competitive. Dealerships wanting your business will usually price match.
- Understand the finance interest rate, charges and other fees applied. These can be high and may quickly erode any taxation benefits. For example, lease finance interest rates can often be 2 – 5% higher than other forms of finance, this is one way lease and salary packaging companies make their money. Ongoing fees and charges can also mount up.
- Ensure you understand clearly what your reduction in take home pay will be and importantly that you can afford these deductions. There are both before and after-tax deductions from your pay under a novated lease.
- Have a plan for what you will do at the end of the lease term. There will usually be a final payout amount to obtain ownership of the vehicle. This is typically between 30% – 50% of the vehicle’s initial price depending on the term of the lease. Alternatively, you may have the option to refinance or undertake another lease of the same vehicle or a new one.
- Do you actually need a new car? Buying a new car can be an impulsive and emotional decision. However, the reward of new wheels can be short-lived once the regular repayments kick in. Cars are also typically high depreciating assets, consider your needs and budget carefully.
- If you want to ensure the maximum value and tax benefits of your vehicle purchase then aim to buy a car below the Luxury Car Tax (LCT) threshold of $77,565 for fuel efficient vehicles (less than seven litres per 100km combined) or $68,740 for other vehicles. Amounts above this threshold attract an additional 33% LCT. In addition, the maximum value of a car for depreciation purposes in financial year 2021 is $59,136.
Killara Wealth can assist with advising you on salary packaging benefits including cars, superannuation, laptop computers, mobile phones and other items. We can provide you with detailed analysis of tax and other savings and the impact these decisions will have on your cashflow. To book an initial complimentary phone consultation click here.