Avoid These Financial Mistakes in Novated Leasing

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Novated leasing is one of the most tax-efficient and cost-effective ways for Australian employees to drive a new car, especially EVs. It allows you to lease your dream car using pre-tax dollars, which can lead to significant tax savings. However, if you’re not careful, you could make some mistakes that undermine the benefits of a novated lease.

Top Financial Mistakes in Novated Leasing You Shouldn’t Make

Let’s outline the key financial mistakes to avoid so you can get the most out of your novated lease.

1. Not Understanding the True Cost of the Lease

One of the most common mistakes is not fully understanding the total cost of your novated lease. While novated leasing provides substantial tax savings, it’s important to be aware of all the costs involved, including:

  • Lease payments.
  • Interest rates.
  • Residual value at the end of the lease.
  • Running costs like insurance, registration, and maintenance.

Some employees focus too much on the weekly/fortnightly/monthly lease payment and forget to factor in the residual value—the amount you’ll need to pay at the end of the lease if you decide to own the car. Make sure you have a complete understanding of all costs before signing a lease agreement.

2. Choosing a Car That Doesn’t Fit Your Budget

It’s easy to get carried away when choosing a new car, especially with the tax savings that come with a novated lease. However, choosing a vehicle that exceeds your budget can lead to financial strain, even with the tax benefits.

Before deciding on a car, calculate how much you can afford to spend on lease payments. Consider your overall financial situation and ensure the lease fits comfortably within your budget. Don’t forget to factor in running costs like insurance, registration, and maintenance, which can add up.

3. Ignoring km Limits

Novated leases typically come with km restrictions that can result in extra fees if you exceed the agreed-upon limit. Some drivers forget to consider how many km they typically drive each year, which can lead to unexpected costs at the end of the lease.

When negotiating your lease, be realistic about how much you drive. If you regularly commute long distances or take road trips, it might be worth negotiating a higher km allowance or selecting a vehicle that aligns with your driving habits to avoid costly excess km fees.

4. Overlooking Fringe Benefits Tax Exemptions for EVs

One of the key benefits of novated leasing for electric vehicles is the Fringe Benefits Tax (FBT) exemption introduced in 2022. This exemption applies to fully electric and plug-in hybrid vehicles below the luxury car tax threshold (currently set at $91,387 for 2024-2025).

Failing to take advantage of this FBT exemption could mean missing out on additional savings. If you’re considering leasing an EV, make sure it qualifies for the FBT exemption to maximise your financial benefits. This can lead to significant savings for both you and your employer.

5. Not Comparing Leasing Providers

Not all leasing providers are created equal. One of the most important steps in the novated leasing process is to compare leasing providers to ensure you’re getting the best deal. Different providers offer varying interest rates, fees, and lease terms, which can significantly impact your overall costs.

Look for a leasing provider that offers:Transparent

  • pricing with no hidden fees.
  • Competitive interest rates.
  • Flexible lease terms to suit your lifestyle and budget.
  • Comprehensive customer support throughout the leasing process.

Taking the time to shop around and compare providers can result in better terms and substantial cost savings over the lease period.

6. Failing to Understand the Residual Value

The residual value is the amount you’ll need to pay if you choose to buy the car at the end of your lease. One common mistake is not fully understanding how the residual value is calculated and how it will impact your final decision.

If the residual value is too high, you may find it’s not worth purchasing the vehicle, even if you’ve been happy driving it. On the other hand, if you don’t plan to buy the car at the end of the lease, you’ll need to be prepared to sell it, re-lease it or upgrade to a new lease.

Either way, make sure you’re clear on your options and the financial implications of the residual value.

7. Not Taking Advantage of GST Savings

One of the big financial benefits of novated leasing is that you don’t have to pay GST on the purchase price of the car or its running costs, like insurance and maintenance. If you fail to factor in these savings when comparing a novated lease to traditional financing, you may underestimate how much you can save.

For example, if your car costs $60,000, avoiding the 10% GST on the purchase price could save you up to $5,454. Make sure to account for GST savings when comparing leasing options, as this can make a significant difference in your overall costs.

8. Opting for a Short Lease Term Without Considering Upfront Costs

Shorter lease terms often come with higher monthly payments. If you choose a shorter lease term (e.g., two or three years), your payments will be spread over a shorter period, which increases your monthly/fortnightly/weekly costs.

While a shorter lease can be beneficial if you plan to upgrade regularly, it’s essential to weigh this against your cash flow and financial goals. Opting for a longer lease term (e.g., five years) can lower your payments and make the lease more affordable in the short term.

Avoid Costly Novated Leasing Mistakes

Novated leasing offers significant financial benefits, but only if you avoid these common mistakes. By carefully selecting the right vehicle, understanding your lease terms, and taking full advantage of the tax benefits and FBT exemptions, you can maximise your savings.

To get the most out of your novated lease, work with a trusted provider like CarBon Novated Leasing, who can guide you through the process and ensure you’re making the best financial decision for your life.

Everyone’s financial situation is different and we strive to tailor a lease that suits your needs. By being proactive, informed and going with a trusted provider like CarBon, you can avoid costly mistakes and enjoy the benefits of driving a new car while saving money.

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