Novated Leases for Repatriating Australian Expats - Yay or Nay..?

Novated leases have been gaining traction as a popular vehicle financing option, particularly evident in the significant 31% share they held in the car loan/lease market in the third quarter of 2023. This marked a notable increase of 14.4% from the previous year. If you're an Australian expat considering repatriation, it's worth exploring whether a novated lease aligns with your needs.

This article delves into the details of novated leases, outlining their benefits and drawbacks to aid in your decision-making process.

Understanding Novated Leases

A novated lease is a tripartite arrangement that involves you, your employer, and a lease company. It's a form of 'salary packaging' where your car lease and associated costs are deducted from your pre-tax salary. This approach can yield tax benefits and other financial upsides. However, it's important to grasp the specific terms and conditions involved.

Pros of Novated Leases

Here are some notable advantages:

  • Tax Efficiency: Significant tax reductions can be achieved as lease and operational costs are pre-tax expenses. This can lead to a noticeable decrease in your taxable income. After all, one of the biggest shocks in repatriating to Australia is the difference in the tax rate, particularly when compared to Singapore.
  • Choice of Vehicle: Unlike standard company vehicles, a novated lease grants you the freedom to select a car that meets your personal or family needs.
  • Inclusive Costs: Your lease can cover routine maintenance, repairs, and other expenses like fuel, offering financial predictability and ease of budgeting. This can make car ownership a much more seamless experience, which can be valuable, particularly if you’ve not owned a car whilst in Singapore.
  • Additional Perks: Many leases include extra benefits such as roadside assistance for added security.

Cons of Novated Leases

However, there are also some potential downsides:

  • Employment Dependence: Your lease is contingent on your job status. Changes in employment can shift the payment responsibility to you.
  • Residual Value Concerns: At the lease's end, you must deal with the car's residual value, which can be a financial uncertainty.
  • Restrictions: You may encounter limitations such as specific fuel suppliers or lease providers linked to your employer, which might not always be optimal.
  • Complexity and Hidden Fees: Novated leases can be complex, with potential hidden costs that are not immediately obvious. This highlights the importance of seeking professional advice before entering into a novated lease or even car financing agreement.

Making an Informed Choice

Consider your financial situation, vehicle needs, and job stability before deciding. A novated lease offers a balance between financial benefits and fulfilling your vehicle preferences. Weigh the tax savings, vehicle options, and implications of linking your car finance to your job status.

Considerations Before Deciding

There is a lot to consider and weigh up when deciding whether a novated lease is right for you, and it’s important to note that you don’t need to have this decision finalised before you repatriate to Australia.

  • Financial Health: Evaluate if the lease's tax advantages and cost structure suit your financial goals. Calculate the overall tax savings to decide whether this is the right option for you.
  • Lifestyle and Vehicle Requirements: Match the flexibility and choices of a novated lease with your lifestyle needs.
  • Career Stability: Reflect on your job security and any anticipated employment changes, as these can impact your lease.

Case Study: Novated Lease Analysis

Imagine Sarah, an Australian expat repatriating and considering a novated lease. She has her eyes on a brand-new Toyota Corolla priced at $30,000. Sarah's annual pre-tax salary is $90,000. We'll break down the financial implications of a novated lease for her.

Step-by-Step Calculations

Vehicle Cost: The initial price of the Toyota Corolla is $30,000.

Lease Term: Sarah opts for a 3-year lease term.

Running Costs: Including fuel, insurance, maintenance, and registration, let's estimate a total of $10,000 over three years.

Tax Savings: By using her pre-tax income for the lease and running costs, Sarah could reduce her taxable income. Assuming a tax rate of 32.5%, the potential tax saving on the running costs alone would be $3,250 (32.5% of $10,000).

GST Savings: Given that running costs include GST (10% in Australia), Sarah can save the GST component. This would amount to an additional $1,000 over three years.

Total Lease Payments: Assuming the lease requires monthly payments of $800, the total over three years would be $28,800.

Residual Value: At the lease end, there's a residual value payment. If set at 40% of the initial cost, it would be $12,000 for the Corolla.

Overall Financial Impact

Total Cost Without Lease: Buying the car outright along with running costs would total $40,000 ($30,000 for the car plus $10,000 for running costs).

Total Cost With Lease: Including lease payments and the residual value, minus tax and GST savings, Sarah would pay approximately $36,550 ($28,800 in lease payments + $12,000 residual value - $3,250 tax savings - $1,000 GST savings).

In Sarah's case, the novated lease not only spreads the cost over three years but also results in a lower total cost compared to outright purchase. This demonstrates the potential financial benefits of a novated lease, particularly in terms of tax savings and cash flow management.

For Australian expats like Sarah returning home, a novated lease can offer a financially viable and convenient option for acquiring a vehicle. It's essential to consider personal financial circumstances, vehicle preferences, and job security when evaluating this option. Despite its advantages, it's also important to be mindful of the potential downsides and complexities involved in a novated lease.

Conclusion

A novated lease is a nuanced financial decision influenced by personal finances, vehicle preferences, and job stability. It provides tax benefits and flexibility but also comes with commitments and complexities. It's not universally suitable, so a thorough personal assessment and possibly financial advice are recommended to see if it aligns with your needs and goals.

 

To Your Financial Success!

Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd - No: 200305462G | MAS License No: FA100035-3

To learn more about how we may be able to help you, please contact us:

✆         +65 8282 5702
✉         jarrad.brown@gfcadvice.com
☜         https://singapore.feebasedfinancialadvice.com

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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.

 

*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.

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