“Novated Leasing” sounds complicated and like something only a rocket scientist could come up with, but it isn’t as bad as it sounds.  So let’s have a look at what a Novated Lease is and how it works in a way my mum could understand.  Not that she is dumb, but when it comes to anything even slightly financial, her brain goes into melt down.
 
So lets look at in two parts, starting with the “Novated” part first.  This is the word that sends mum’s brain to the critical stage, just before the “Leasing” tips it over into full scale melt down.  Novation is a legal term, which simply means to replace or transfer.  It may involve replacing either one person with another or one obligation with another, or both.  So think of it as a Transfer Lease.

An example of the Novation of an agreement would be if You have a house and agree to rent it to Jenny for a year.  Jenny shares the house with Rose, but after 6 months has to go overseas.  Instead of cancelling the rental contact and drafting a new one with Rose we could Novate (transfer) it from Jenny to Rose.  Jenny, Rose and You all have to agree to this and by doing so the original rental term remains, but now Rose is responsible for paying You the rent, not Jenny.

Now let’s look at the “Leasing” part which for most of us is a term we are familiar with.  It’s the bit where one person lets another have or use property for an agreed amount of time (term of the lease) and for an agreed price (rental or lease payments).

So far so good I hope, so let’s look how these apply to a Car Lease.  You may have noticed that there are three people involved when we Novate.  In the above example it was Jenny, Rose and You.  For a Novated Car Lease the three are the Employee (you), the Employer and the Finance Company.

So we start with a lease agreement between the Employee and the Finance Company for a Car.  Then, because of the tax benefits the Employee asks their Employer to enter into a Novated Lease which would transfer the Employees obligation to make lease payments to their Employer.

Not surprisingly the Employer will only agree if they can reduce the Employee’s salary by the cost of the lease payments, so they are not out of pocket.  They will then give the car to the Employee to use just as they had before they the whole round about Novated Leasing thing.

If I still have you, then you are probably wondering why the hell go to all the fuss, the Employee is still paying the lease through salary deductions.  Well you are right to an extent, if they were paying $550 a month before the Novation and then had a salary deduction of $550 after then it doesn’t look like they have achieved much.

That is because the savings are only visible when you look at after tax income.  If you are on a salary of $50,000 a year and have a marginal tax rate of 31.5% (Medicare levy included) then you need to earn $803 before tax to have the $550 after tax to pay the lease on your car.

If you are able to pay for the lease costs out of pre-tax income, by salary sacrificing the cost of the lease, then you pay $550 out of pre-tax income, not $803.  So you have just increased your salary by $253 a month or $3,036 a year.  Congratulation on your 6% pay rise (based on $50,000 annual salary).

As you can see the tax savings are what all the fuss is about, and there are more.  Because the car lease has been Novated to the Employer, it is now a business expense for that employer.  So the Employer gets a GST credit for the GST on the lease charge of $550, which is $50.  So instead of taking $550 out of the Employee’s salary each month, they only take $500 out because they get the $50 back from the government.

Now the salary savings are up to $303 a month ($803 less $500), or $3,636 a year.  That’s equivalent to a 7.2% pay rise if you are on $50,000 a year, I’ll take that thank you very much. 

Ok, so why isn’t everyone doing it?  I hear you ask, and the answer is that it isn’t quite as simple as that.  The above example is just to show you what the advantages are and how they come about.  What we also need to take into account is Fringe Benefit Tax (FBT), which is a tax that was introduced in part to combat the huge tax advantage Novated Car Leases give Employees.

The FBT rules affect this happy little arrangement by taxing the Employer for the benefit the Employee gains from having the car.  Not wanting to be caught short, the Employer then deducts the tax cost from the Employee and in doing so reduced the benefit.

How this ultimately reduces the benefits depend on the personal circumstances of the Employee and the value of the car.  I would require another five pages to explain this fully, so will save it for another blog entry.  The best way to see how it would affect you and what the ultimate benefits are, is to get an assessment based on your personal circumstances.  Fill in the form on the home page of this site to get your free assessment.

In summary, a Novated Lease is an arrangement between three parties (e.g. Employee, Employer and Finance Company), where the lease benefits and obligations of one party (Employee) are transferred to another (Employer).  It is normally done with a salary sacrifice arrangement between the Employer and Employee with the ultimate benefit to the Employee being tax savings from running their car and the Employer having a happier Employee at no extra cost.

I hope this has helped make sense of what a Novated Lease is and why they are of benefit.  Feel free to leave a comment about this article or ask any questions.  We are looking for topic’s that interest you for future blogs, so would love to hear from you.

Best Wishes,
Tom Collins

For all those cost conscious drivers out there, here are 10 Top Tips on how to save on running your car.  I am sure you do some, but there may be others you are missing out on:

1. Novated Leasing: By leasing your car through your employer you can pay the majority of the costs of running your car out of pre tax income and also save on the GST for running costs.  This can be by far the greatest way to save money on your car, but will depend on personal circumstance, but it is not uncommon to save between 20% and 30% on the cost of running your car, which is often $1,000 to $,3000 A YEAR!!!

2. Insurance: For most this is the single biggest ticket cost of running your car after the initial purchase.  So invest the time and shop around for the best quote and don't be afraid of swapping - insurance companies rely on laziness as they bump up premiums each year.  By all means go back to your current insurer to see if they will match or better a quote you get else ware, but make sure the options are the same.  In particular the excess and insured value of the car will have the biggest impact on cost.  So select as high an excess as you can afford to pay if you have an accident and use a realistic value for your car.  If unsure how much your car is worth then look it up in RedBook.com.au or look at what people are offering to sell a similar car for on line and knock 5%-10% off that value.

3. How you Drive:  How you drive your car will determine how fuel efficient it is.  The two key factors in this that you can influence is rate of acceleration and speed.  The quicker you accelerate the more rev's you use which means the more fuel you burn.  Ultimately, how fast you are going also determines this, as drag (wind resistance) increases with speed, so the faster you go the more fuel goes into overcoming drag relative to the fuel needed to maintain a speed.  So in short - drive smoothly and don't speed - it will save you in more ways than one.

4. Average Price Petrol: When you fill up, don't fill your tank right up, instead fill up with the same dollar amount of petrol each time.  So if it takes around $70 to fill your tank when it is low then fill with $60 instead and always fill with the same $60 amount.  That way when the price is low you will buy more petrol than when it is high.  This method is borrowed from investing, where you buy a set $ amount of investments periodically rather than try and guess the best time to buy.  In doing so you get a lower average price.  So instead of worrying about finding the lowest priced petrol day or service station, you will automatically be buying less petrol when it is expensive and more when it is cheaper.

5. Public Transport: If you can, leave the car at home and catch public transport.  Cars are necessary for most of us in Australia due to distances and generally poor public transport options, but if you can, take the train or bus instead.  They are generally cheaper than the fuel and were cost on your car for the same trip.

6. Car Servicing: Getting your car serviced regularly (every 6 months) can often work out cheaper than not.  Doing so can prevent small cheap problems becoming big expensive ones.  As always shop around for the best quote to service your car to save even more.

7. Aircon or Window: It all depends on speed really.  If you are going fast, the drag (wind resistance) from an open window will cost you more in petrol than having the aircon on.  So below 80kmph try to open a window, but from about 80kmph up the aircon becomes you fuel efficient friend.

8. Weight Cost: The heavier your car is the more petrol you burn when you drive around.  So get the clutter out, don't leave heavy items in the car any more than needed and ask your passengers to go on a diet.  Ok, maybe not the last one, but every Kg you carry adds to the cost of running your car.

9. Fill before Empty: Waiting until your car is running on fumes before you fill up is a good way to fill your engine with gunk.  Impurities and other things that shouldn't be in your fuel tank generally go to the bottom.  If you let the fuel level get to low they will find their way to your engine and clog it up - next stop expensive repair...

10. Basic Maintenance: In addition to regular professional servicing, you should do a few things to look after your car and make sure it is running well.  Make sure the oil does not get to low, and if you can change it every 3 months.  Tyre pressure should be checked at least monthly and always if you suspect they are low.  Not only will this make your drive safer, it will also save on petrol, because tyre pressure if a factor in fuel economy.  The other thing to check regularly is your radiator.  Make sure it has enough water and coolant especially during the hotter months of the year.  Lastly, keep an eye on your instruments (engine temperature in particular) and if something doesn't feel right, check it out or get it checked out.  As mentioned up in number 6, sort out small problems before they become major ones.

Safe and Cheep Driving to you all.

So starts a new year, with new resolutions, most of which will be lucky to last until February.  They say the best way to keep a new years resolution is to commit to it socially or in public.  So hear it is - "I resolve to help others save on their car costs like I have".

Over the past 3 years I have saved an average of over $2,000 a year in the cost of running my car.  Money I have used to reduce my debts and save even more money!  Savings when applied against debt snowball and alow you to acheive your financial goals much faster.

The aim is to eliminate all your expensive debt first, such as credit card debt (the greatest of plages upon modern life), personal loans and car loans.  Generally in that order, simply because it is generally the order they sit in terms of how high the interest charges are.

Ultimatly how the savings are used are up to you, I am just a fan of reducing debt and the cost of debt (interest).  If you use it to take an overseas holiday each year or buy a top of the range entertainment unit or just give the money to charity, that's fine - what ever works for you.

Anyway, back to that new year's resolution - how to do it is the issue.  So I have started this site and will use it to help others save thousands on running their car.

So, welcome to Free Wheels Finance, where I look forward to saving you big bucks on financing, runing and buying your car. 

Happy New Year, may it be a safe and prosperous one for you and your family.

Best Regards,
Tom Collins
Free Wheels Finance