Leasing a new car is becoming a popular alternative to buying a car outright in Australia, with novated leases an attractive option for employees wanting to cut down their taxable income while getting a new car at the same time.
The situation is a simple one, whereby employees pay for a vehicle's finance with their pre-tax salary, and in return receive the use of a brand new car over a number of years.
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The tax deductions available can make leasing a car an attractive option to the self-employed and some employees.
Rather than borrowing money to buy a car, a lease is a contract under which you pay for the use of the car.
A car lease can also offer simplicity because it can include running costs like servicing and insurance – you pay a monthly amount and let the lease company take care of it.
When the term is up, you hand the car back, though it is possible under some types of lease to buy the car at the end of the term. This means that the monthly payments you made in addition to the final balloon payment will likely exceed the as-new value of the car. Alternatively, you can opt back into another lease with a brand new car and start the cycle again.
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If you own a business or are planning to buy your next car under a salary sacrifice agreement, it’s important to have the right kind of lease or finance to make the most of your deductions.
For an employee, a novated lease lets you make monthly repayments and running costs come out of your pre-tax salary, reducing your taxable income.
Business owners are better served with hire purchase finance or a chattel mortgage, which allows you to claim back GST upfront.
Although the tax deductions available in some situations can reduce the cost of owning and operating a vehicle, there’s no escaping the fact that the remainder comes out of your pocket. It pays to seek personal financial advice and to do your sums before you jump in and sign on the line.
Three things to remember
- A salary sacrifice arrangement can save you a lot, especially for those in higher tax brackets
- Not all leases give operators the option to buy the car outright at the end of the term
- Novated leases allow you to pay one monthly payment for a new car, while also taking care of running costs
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So, should you do it?
Before you start toward the car dealership, there are a few factors that depend entirely on your circumstance. For a novated lease, your employer has to offer the option firstly - only then can you take advantage of having your work pay for your car out of your pre-tax salary.
Having a new car every few years seems like fun, but you'll likely be paying more for the same thing especially if servicing and maintenance is included.
Again, if you're in a marginal higher-tax bracket, it's another way you can reduce your income come tax time. See a financial advisor or a leasing consultant in order to find out if leasing will work for you.