Salary sacrifice car loans, Novated Leases, may be used by employers as an employee bonus and may provide lower income tax payable for employees. This type of motor vehicle finance involves agreement between employee and employer with benefits for both available.
Now could be the time to consider if Novated Lease is a workable option for you. The start of a new financial year is a popular time for employers to issue wage increases or bonuses to employees. A Novated Lease may be an alternative.
When taking on any type of finance all aspects should be considered. With Novated Lease, both employers and employees should assess the benefits and any potential downsides. We provide details on this motor vehicle financing facility, including some of the points for both parties to consider.
Salary Sacrifice Car Loans – Novated Lease
Novated Lease is a motor vehicle finance arrangement involving an employer, employee and a lender. The loan is essentially ‘novated’ or transferred from the employee to the employer. The employing business leases a motor vehicle for an employee, with the employee sacrificing a portion of the salary to cover the lease payments and other expenses for the vehicle.
In order to proceed with such an arrangement, both employee and employer must agree. Either party may initiate the idea with the other. Neither party is compelled to proceed. It is totally their choice.
The employee selects the vehicle they want. Employers may have a price limit they are prepared to finance. The parties then seek a Novated Lease with Salary Sacrifice loan through a broker or lender. The finance application is completed by the business, with their financials and credit rating assessed by lenders when preparing offers. The vehicle is registered and insured in the name of the business and the business covers all the running costs.
An amount which includes the payments and other costs of the vehicle are calculated by the business and this typically forms the amount that the employee must sacrifice from their wages. The amount is deducted each pay cycle from pre-tax salary. The more expensive the vehicle, the higher the Lease payments and the greater the amount of salary that needs to be sacrificed.
Rates, terms and repayments with this finance product are fixed. As with other Lease finance, a residual is included in line with ATO guidelines. At the end of the Lease term, when all payments are finalised, the vehicle ownership is transferred to the employee and the salary sacrificing concludes.
Salary Sacrifice Car Loan Tax Features
The business taking on the Novated Lease realises the tax benefits of deductible monthly payments. The ATO treats Lease payments as business expenses, and they are fully deductible.
Depending on their salary range, employees may enjoy a tax benefit. The sacrificed salary is deducted from pre-tax wages. Depending on the amount involved, this may result in the employee moving down to a lower personal income tax bracket. Paying less tax weekly and less annual tax payable. Resulting in a net benefit and the opportunity to eventually own a new vehicle.
If the employer granted a pay increase instead of a Novated Lease, the increase may move the employee into a higher tax bracket.
Interest Rates on Salary Sacrifice Car Loans
Interest rates on Novated Leases are business interest rates which are lower than personal car loan interest rates. For employees, this provides the opportunity to purchase a vehicle with finance at lower rates than they would have been offered with a Personal Secured Car Loan. While they are sacrificing part of their wages, the repayments would be lower than if they took on finance in their own name.
If the employee has credit issues, this may deliver a not just a business rate but a significantly lower rate than they would be offered if they applied for a loan based on their own credit profile.
The rate offered is based on the financials and credit profile of the business. The rate is fixed so decisions by the RBA or the lender will not change the rate or the repayments during the leasing term.
Considerations for Employers and Employees
Novated Lease may present an alternative for employers to offering staff a bonus or pay rise. For employees, they may benefit in several ways. Individuals that struggle with following a savings plan may benefit from this arrangement.
The credit profile and financials of the business are assessed. Employees should be certain that the business has good credentials in order to be offered a highly competitive interest rate.
The cost of the vehicle determines the salary sacrifice amount. Employees should consider if they can afford to forego that amount from every pay over the number of years of the Lease towards buying a car. Would saving for the vehicle be a better option where the amount saved can be varied according to other personal bills and expenses?
Employees may consider how long they intend to stay with that company. If they have plans to seek another job within the Novated Lease term, they may also need to make plans about their vehicle finance. If they want ownership of the vehicle and they leave that employer before the end of the Lease term, they will have to finalise the loan themselves. This may involve taking on their own Personal Car Loan or an Unsecured Personal Loan.
Employers may consider if they agree to this arrangement with one employee, will others request the same? How will that impact the business financial position? While the sacrificed salary is structured to cover the expenses, the additional liabilities on the balance sheet may have an effect on future applications for business finance.
To discuss if Salary Sacrifice Car Loans are right for you, speak with one of the brokers at Jade Car Loans 1300 000 003.
DISCLAIMER: IN REGARD TO MISREPRESENTATIONS AND ERRORS CONTAINED IN THE MATERIAL AS PRESENTED, LIABILITY IS NOT ACCEPTED. THE DETAILS AND CONTENT IS PROVIDED FOR CAR BUYERS AND INDIVIDUALS AND BUSINESS SEEKING FINANCE PURELY AS GENERAL INFORMATION. THIS IS NOT PROVIDED AS THE ONLY SOURCE OF FINANCIAL INFORMATION. ANYONE THAT CONSIDERS THAT NEED FINANCIAL ADVICE ABOUT THEIR SPECIFIC REQUIREMENTS SHOULD SEEK THEIR OWN FINANCIAL ADVISOR.
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