Purchasing vs leasing a car

[Nawdy]

I'm considering aquiring a new car for the wife, but can't decide whether to lease (via salary sacrafice) or purchase. I know there are a few threads related to leasing, but I haven't been able to find one that directly compares one to the other.

I am basically after the pro's and con's of each. I'm no financial genius, but I do want to be as informed as possible prior to making a decision. I just want to make sure I have a handle on it all prior to getting formal financial advice. If it easy to keep it simple (I'm a big fan of the KISS method...), it would be a huge help.

Thanks in advance for your assistance!!! :D

PS: Knowledge is power.

[dark]

My wife has a novated lease, petrol paid for, insurance, tyres, servicing, and registration. She has to drive 25,000km a year. We worked out how much we would pay on a personal loan per month and then added the other expences and the Novated lease appeared the clear winner. She also received a $200 a fortnight tax break through salary sacrafice. It is just important that you do the kilometres, if you do not the FBT kills you. It is working for us.

[TigerMon]

Fringe Benefits tax is a real pain when leasing. If you lease through work it comes of your PRE-tax income, therefore your taxable income is lower, therefore you pay less tax. Which means that you are infront as normal loan repayments would be from your POST-tax income. However you have to consider FBT which for me meant that it was cheaper with finance. Check online search "lease calculators".

[djgelling]

Your going to get many different answers to this and be no les confused/unsure than you now are.

BUT, I am on top marginal rate, use the contribution method to pay FBT, didn't pay GST on the purchase price and don't pay GST on running costs. All costs after deducting the contribution amount of the FBT in POST TAX dollars are then paid in PRE TAX dollars. Also don't forget to include calculations for the capital freed up by using this method. It meant for me on a $50k car that I am about $2.5k in the hand a year better of under Salary Sacrifice whilst travelling a bit overn 15,000km a year, If I could naturally do better than 25,000km a year I would be Quids in front. Either sepend a few days infront of the computer and nut it out for yourself or go and see a financial advisor. A vehicle is the most complicated form of Salary Sacrificing that you can do. It took me about 3 weeks of constant looking at it to fully understand it.

[Bilharzia]

I'm considering aquiring a new car for the wife, but can't decide whether to lease (via salary sacrafice) or purchase. I know there are a few threads related to leasing, but I haven't been able to find one that directly compares one to the other.

I am basically after the pro's and con's of each. I'm no financial genius, but I do want to be as informed as possible prior to making a decision. I just want to make sure I have a handle on it all prior to getting formal financial advice. If it easy to keep it simple (I'm a big fan of the KISS method...), it would be a huge help.

Thanks in advance for your assistance!!! :D

PS: Knowledge is power.
Just done the same exercise. My novated option is as an employee, not my own business, and with no kms business related.

Wife will drive the car. For us, there's two main considerations:
- Is she willing to drive a 4 year old car
- Will it travel less than 15,000 kms per year

If yes to both of these, the outright buy of 4yo car will free up more cash on a monthly basis than novated lease, and add most wealth over a lease period. Answer is quite different if you intend to purchase a new car and/or drive many kms. Risk is that there is no warrantee.

A mate built a spreadsheet to do whatifs on new car nov leases. PM for a copy.

Tony

[Nawdy]

Just done the same exercise. My novated option is as an employee, not my own business, and with no kms business related.

Wife will drive the car. For us, there's two main considerations:
- Is she willing to drive a 4 year old car
- Will it travel less than 15,000 kms per year

If yes to both of these, the outright buy of 4yo car will free up more cash on a monthly basis than novated lease, and add most wealth over a lease period. Answer is quite different if you intend to purchase a new car and/or drive many kms. Risk is that there is no warrantee.

A mate built a spreadsheet to do whatifs on new car nov leases. PM for a copy.

Tony

It is going to be a new car, and be doing more than 15,000km's per year (probably over 25,000). Novated lease will be as an employee with no business km's. PM will be sent!! :)

I don't mind getting different answers - I'd rather get all points of view :D

[djgelling]

Your going to get many different answers to this and be no les confused/unsure than you now are.

BUT, I am on top marginal rate, use the contribution method to pay FBT, didn't pay GST on the purchase price and don't pay GST on running costs. All costs after deducting the contribution amount of the FBT in POST TAX dollars are then paid in PRE TAX dollars. Also don't forget to include calculations for the capital freed up by using this method. It meant for me on a $50k car that I am about $2.5k in the hand a year better of under Salary Sacrifice whilst travelling a bit overn 15,000km a year, If I could naturally do better than 25,000km a year I would be Quids in front. Either sepend a few days infront of the computer and nut it out for yourself or go and see a financial advisor. A vehicle is the most complicated form of Salary Sacrificing that you can do. It took me about 3 weeks of constant looking at it to fully understand it.

Oh yeah, should have added that this was a Novated Lease as an Employee, ie the employer just signs the novation deed, has NO input to the deal in any way shape or form.

I'll just add that the best way to Salary Sacrifice a car is to buy the cheapest car that you can live with (Less FBT) and drive the most kilometer's (lower FBT Factor).

[LTDCV8R]

I thought I might add my 2 cents worth. :rolleyes:

I have a financial background and can say this comfortably without being an expert in leasing......... :cool:

I have a Novated lease travelling just over 15k/yr. It works out about square with a loan, however, management of the costs is easier. All items included in lease program. As said in previous post, if you travel over 25k/yr you would generally be clearly in front.

Now one thing to consider with FBT, is that if you earn less than the marginal rate it can still be a good option. All you need to do is contribute to the running of the vehicle and the so called FBT ( a calculated value) can be reduced to zero. This means that you have a pre-tax cost and a post tax cost. The cost of which is less (ie more cash in hand) than pre-tax contributions alone.

You need to do the figures, however, easiest way to think about it is that FBT is at roughtly 48 cents in the dollar. Equal to about marginal rate. If you earn less, you can contribute to running the vehicle, offsetting the costs and therefore converting the 48cents in the dollar "tax" to a lower rate in the dollar "tax". (i.e a saving). :D There are leasing sheets, however, they do not factor this in very well. Ask about the pre and post tax contributions before taking up a lease.

If you have any other questions I can direct you to some people who do this sort of thing.

[jsttry]

Don't tell me the missus is sick of the SS, or has she been banned ;)

[Nawdy]

Most of what has been mentioned has been built into the lease package on offer (going by telephone discussions with the finance provider), so I know I'm on the right track.


Don't tell me the missus is sick of the SS, or has she been banned ;)

No, just a combination of things. Oh, plus the factor the Wet season is upon us and her right foot isn't too sensitive when it comes to driving our car... :eek:

[VXII SSimo]

My SS is on a novated lease through Defence. Saved about $8k at purchase time due to GST saving and Defence Fleet purchase. The taxpayer pays my GST for fuel/maint/ins, etc. I do 25k per year, so savings are pretty good.

Reduced taxable income means when my little ones were at daycare, reduced my contribution for fees. Next year when I move to Katherine and my wife isn't working, she receives more allowance from Johnny Howard.

When you consider all this, works out pretty good.

Cheers
Simo

[Dacious]

Novated lease on Munro. GST paid by employer. FBT is a killer, but paid pretax.

When I did all the sums, compared to taking a personal loan, I am ahead my running costs; incl. fuel, maintenance, insurance, rego. It is worth getting a fleet card for fuel - usually get a discount plus you're paying pre-tax dollars. If you fill up at some other brand of servo you can get reimbursed. Maintenance and parts too, is at fleet prices - usually 10% off.

The FBT is the killer, but basically if you are going to buy a car on more than 90% finance then salary sacrifice leasing is cheaper - especially the dearer the car is.

Remember to get a letter from her employer stating she is eligible for a S-S as most dealers get a rebate from the manufacturer for fleet which they will pass on.

I chose a slightly higher contribution rate which decreases the balloon payment if I choose to buy.

To sum up: If you have cash or substantially most of the purchase price, cash is always cheaper than any finance.

If you're going to finance, then novated lease is cheaper than personal loan if you bundle the running costs, provided you do 15,000kmm p.a.

Novated lease lets you trade in your old car or make a cash contribution to price, to reduce financed amount.

Novated lease lets you lease a s/h car - BMs and Mercs up to seven years, most other brands up to 2 depending on lease co. So you could take a lease on a demo or ex-lease vehicle!

Novated lease means you are officially the owner, get extended warranty if applicable and you keep the car etc.

Novated lease lets you mod car as long as it stays roadworthy and you don't invalidate insurance. One of the guys here at work knew he was going to turbo his diesel Patrol which also meant a new heavy duty clutch. He built the money for this into his maintenance allocation. Sae with all dealer fitted accessories - usually a fleet discount is applicable and it all can be built in at purchase.

Money disappears from taxable amount, plus you don't have to find lump sums for rego, insurance etc as it is paid on drip-feed.

Novated lease finance is 1-2% cheaper than personal car loan, plus employer pays GST on it usually.

[djgelling]

To sum up: If you have cash or substantially most of the purchase price, cash is always cheaper than any finance.



This is the bit that most people forget when working this out, the capital affect of NOT using their own cash. Most people have a mortgage, imagine that the $50k cash or so that you spend on a car is instead put onto your mortgage, Voila! instant $3,000 a year less mortgage interest payments (at 6%). No mortage?? Invest that money in Funds and earn 8%, you now have an extra $4,000 a year!! Use salary sacrifice to effectively salary package your mortgage or investment. As I said in an earlier post most people forget to take into account the capital effect of not using their own cash.

[chops]

If you are going to buy a BRAND NEW car anyway, and you will DEFINITELY do 25k kms, and you earn enough to be in the top tax bracket, there really is no downside.

[HOTSV6]

my 2 cents worth.

Salary sacrificing that attracts FBT must be grossed up on your group certificate for tax purposes. This grossed up value is used as your income when determining various rebates, allowances and the medicare levy.

One aspect of a novated lease is that your termination as an employee will not excuse you from the lease contract.

A novated lease does not give you the right to payout the car and purchase the vehcile in all circumstances. A finance as opposed to an operating lease gives you this facility.

FBT is levied at 20% of the FBT base price of the vehicle for 15000-24999kms and 11% for 25000-40000kms. Contributing to the running costs makes no change to the FBT paid. You would need to contribute to the purchase price of the vehicle (which alot of fleet companies may not allow) to reduce this amount.

A novated lease does not make you the owner (otherwise it would not be a lease would it). It simply removes the rights and obligations from the employer of an original lease.

You cannot make modifications to the vehicle without getting permission from the owner (the lease company) and these modifications can in some instances be paid for by the lease company and reflected in increased lease payments. In other instances, the mods can reduce the residual payout at the expiry of a finance lease.

As was mentioned earlier, the opportunity cost of using your own money is that you no longer have it to spend on other things. You can lease a $50k vehicle with no deposit. Try borrowing that from a bank to buy it outright.

The biggest saving I received from leasing was the discount on the purchase price (under $30k for an SV6). Therefore the FBT was levied on this number and I pay the statutory minimum residual after 4 years of 34% which is about $10k for a 4 year old car with 45000kms on it. not bad i reckon.

[SilverB]

If you have the money you can have a go at an associated lease. It is like Novated lease except you get your wife to buy the car and she leases it back to you. Everything else is just as a Novated lease except with your wife as the financer. If she is not working the interest she gets from the repayments is taxed at the lowest rate so you not only get the tax break on your salary she pulls a small income from the "interest" you have paid for her finance. All depends if she has the cash to buy it.

Some of the lease companies will help you set these up I think. The Fleetcare web page has something about it under associate lease.

[madder]

Hey Nawdy,

LTDCV8R has summed things up pretty well but here's how it's working in practice for me:

2003 BA XR8 Ute purchased privately in 2003 was converted to novated lease this year, the leasing company paid out a personal loan and that became the amount the lease is based on.

I know I'm going to do about 30000ks this next year which puts me in the 25-40k category. The FBT works out to 11% of the new car value and therefore is about $4500 in my case.

If you read the ATO regulations, whatever you pay towards the running of the car, the FBT is reduced by that same amount. In my case the salary sacrifice includes the lease, insurance, rego and tyres. I pay for my own fuel which might seem strange but by paying my fuel costs after tax I reduce my FBT liability. Over 30000ks my ute will consume about $4500 of fuel therefore reducing the FBT to nil. If I don't quite make that amount in fuel costs then I can pay a 1 off amount to my employer to make up the difference in April when FBT is reported. So I am losing out on maybe $1500 - $2000 in tax breaks by paying for my fuel after tax but end up better off because my FBT is cancelled out.

So what's the bottom line I hear you ask!

For

Total running and finance costs have ended up about 30% cheaper than personal finance due to tax breaks and cheaper repayments.

Cash flow is smoother as I get a reduced salary but am not slugged with large annual costs like insurance, rego and tyres. They are already covered in my weekly sacrifice.

The savings from this arrangement can be ploughed into investments whose earnings will help offset the costs of having a nice shiny V8 gas guzzler.

As a part of the arrangement with work I use their insurer who is about $300 cheaper than my previous insurer and the vehicle is insured for work and play.


Against

I will not own the ute at the end of the next four years, there will be a residual.

If I move to a new employer I will not be released from the lease, therefore I either go back to personal finance to payout the lease, sell the vehicle or make sure my new employer will support a novated lease and salary sacrifice.


Hope this is is useful. I know it's tough working out whether it's worth it. I did hours of my own research then hassled the company accountant and my own who charged a bit but explained it well and the savings quickly made the visit worthwhile.

Cheers,

Jason

[Dacious]

my 2 cents worth.

A novated lease does not give you the right to payout the car and purchase the vehcile in all circumstances. A finance as opposed to an operating lease gives you this facility.

Yes, it does - the car is 'novated' to the employee and all the company wants is the residual. if the residual is not forthcoming you forfeit the car.


A novated lease does not make you the owner (otherwise it would not be a lease would it). It simply removes the rights and obligations from the employer of an original lease.

Beg to differ. I think you're confusing a standard lease where the car and all expenses is covered by your employer and you just make a direct payment, but the employer is listed on the rego and in insurance as the owner and insured.


You cannot make modifications to the vehicle without getting permission from the owner (the lease company) and these modifications can in some instances be paid for by the lease company and reflected in increased lease payments. In other instances, the mods can reduce the residual payout at the expiry of a finance lease.

Again, depends on lease. Lease companies are mainly concerned with you not invalidating your insurance provisions. Obviously you can't do anything under the terms of your insurance which will kill the value of the car like cut the back off with a gas axe. Things fitted to the car like dealer-fitted accessories and original equipment like the wheels and sound system must remain with the car and be able to be refitted.

But if I fit a legal exhaust my insurance company knows about the lease co. don't care, as part of a novated lease. Obviously I have to keep the original for refit if I plan to hand the car back, or surrender the value of a replacement.

[naughts]

I am a bean counter by profession so here is my 2 cents worth.

there are no hard and fast rules over which one is better, because there are too many variables involved which are specific to each person requirements.

Personally i went for the purchase option mainly because if you want to do any mods, it is not allowed under a novated lease unless you get it all packaged up at the start of the lease term, and also when you salary sacrifice your employer will pay you less super which needs to be factored in.

[Devoran]

Personally i went for the purchase option mainly because if you want to do any mods, it is not allowed under a novated lease unless you get it all packaged up at the start of the lease term

Maybe that's the case with your leasing company - however, I can do anything I like to the vehicle, send the lease co the receipts, get the refund and have it built into the lease over the complete term, so it's not gospel :)

In reality, it's your car and your lease (if it's novated), so you should be able to do whatever you want :)

[PJK]

A bit OT but I'll ask anyway.

Is a ute on a novated lease exempt from FBT the same way it would be if the company owned the ute, if the vehicle is used for business purposes.

Cheers

[EL2]

Maybe that's the case with your leasing company - however, I can do anything I like to the vehicle, send the lease co the receipts, get the refund and have it built into the lease over the complete term, so it's not gospel :)

In reality, it's your car and your lease (if it's novated), so you should be able to do whatever you want :)

Lucky you!!!! :)

With my leasing company, they explicitly say, in black and white terms in their policy documents, that under no cicumstances am I allowed to modify my car whatsoever without thier permission in writing. Now whether this applies to me putting in a mobile phone kit or supercharging it, doesn't matter.

I wanted to chuck on a cat back exhaust. So I asked them in writing. Their response : REFUSED.

Oh well. 3yr 3mths to go til out of lease. I can wait :cool:

(Funnily enough, I got it dealer fitted with towbar and tinted windows, both fitted at the dealer, dunno how that goes with the leasing mob!)

[Nawdy]

Thanks a lot for all the info guys and gals - this is exactly what I was looking for!! Hopefully others will find it as informative as I have. And it is definatley helping me make a choice.

This is one thing I love about this forum - people are willing to help out others freely! Once again, thanks... :D

[VX2VESS]

this is all interesting but i guess you all are paying $1K plus per month. anyone able to do better and how ? for those who don't get it company paid for that is...

[LTDCV8R]

A bit OT but I'll ask anyway.

Is a ute on a novated lease exempt from FBT the same way it would be if the company owned the ute, if the vehicle is used for business purposes.

Cheers

In response to your question, FBT is essentially a tax that is levied on any item that has value to an employee. That is because tax is designed to be on income, a "freebee" from the company also represents income, albiet in another form.

Therefore the tax office is trying to capture any "Fringe Benefit" that an employee gets that is not income. Any benefit is subject to FBT. This would also include a ute if used for private purposes, especially if in a novated lease.

Regards.

[HSVREDSLED]

Very informative and excellent posts....

heres my 2 cents worth...

If you...

1. Need a car but dont have one, or have one that is falling apart.

2. Do more than 25,000 ks a year,

3. Are currently paying a sh&tload of tax

4. Dont have a lazy 50k to pay cash for a car..

Do it.

if it wasn't for salary sacrificing, I would not be driving a clubby, grinning from ear to ear every time I drive to the shops to get the milk...and spending hours on this forum.

[fester1]

Very informative and excellent posts....

heres my 2 cents worth...

If you...

1. Need a car but dont have one, or have one that is falling apart.

2. Do more than 25,000 ks a year,

3. Are currently paying a sh&tload of tax

4. Dont have a lazy 50k to pay cash for a car..

Do it.

if it wasn't for salary sacrificing, I would not be driving a clubby, grinning from ear to ear every time I drive to the shops to get the milk...and spending hours on this forum.


This is an excellent, informative thread but HSVREDSLED you deserve the credit for summarising it for all of us. That's exactly why/how I got my car (although I couldn't stretch as far as a clubbie i'm afraid).

[KeenGolfer]

You can still get great benefit from only doing 15,000 kms p.a. My lease which is for 15k pa, costs me the same amount per week as a straight loan for my car. Yet I get fuel, insurance, tyres etc as well for the same price. So, in short even though everyone seems to say 25k+ to get benefit, even doing 15k will save you at least $100 per week.

[jneil]

You can still get great benefit from only doing 15,000 kms p.a. My lease which is for 15k pa, costs me the same amount per week as a straight loan for my car. Yet I get fuel, insurance, tyres etc as well for the same price. So, in short even though everyone seems to say 25k+ to get benefit, even doing 15k will save you at least $100 per week.

Correct,

To get a true indication of what it is worth, you need to assess each person/car/circumstances on an individual basis to get an idea of what it will cost and if it is worth it.

I have leased for the last 5 years and it is totally worth it for me. Some people don't have a clue how it "could" benefit them and until you add up all the costs and use "their" numbers, you do not get an accurate picture.

Even if you are saving $10 a week, it is still a saving!

The major factor is the amount of km per year you do, this could add (or save) several thousand dollars to the annual costs. The costs of the car should be similar and the serviceing, fuel & rego figures should also be similar. The more km the better the savings/figures will be, pure and simple.

Use one of the online calculators or a financial advisor (a free one of course) and do a quick before & after using releastic figures to get a proper picture.

Jeff.

[HOTSV6]

Maybe that's the case with your leasing company - however, I can do anything I like to the vehicle, send the lease co the receipts, get the refund and have it built into the lease over the complete term, so it's not gospel :)

In reality, it's your car and your lease (if it's novated), so you should be able to do whatever you want :)


I'm also a bean counter and here's my 3rd and 4th cents worth:

My lease company will not let me make any changes without them being informed prior and if approved, they will be grossed up into the lease payments.

Perhaps 95% of novated leases are operating leases as opposed to finance leases. Under an operating lease, the car is not registered in your name and you flog the guts out of the car and simply return it at the end of the lease. It can of course still be novated.
Only a finance lease gives you the obligation to payout and keep the car. This is why they are generally cheaper because you bear the risk of having to payout on a car that may be worth less than the residual. A novation simply releases the employer from the obligation to pay a residual and the employee derives the right to possession of the vehicle during the term of the lease.

[Tibby]

She does not have petrol paid for does she? Novated lease = Gross Salary - all forecasted costs = net salary.

Unless she claims petrol as well.

Novated lease means you still pay for tyres, petrol servicing etc, but basically the purchase and cost of ownership of your vehicle is done before tax , compared with a personal loan which is after tax.

A good way to go if you want a new car, can novate the lease and reach the target Kms :) .

[dark]

She does not have petrol paid for does she? Novated lease = Gross Salary - all forecasted costs = net salary.

Unless she claims petrol as well.

Novated lease means you still pay for tyres, petrol servicing etc, but basically the purchase and cost of ownership of your vehicle is done before tax , compared with a personal loan which is after tax.

A good way to go if you want a new car, can novate the lease and reach the target Kms :) .

I do not pay for anything, petrol, servicing, tyres, Insurance or Registration.

[Nawdy]

Now one thing to consider with FBT, is that if you earn less than the marginal rate it can still be a good option. All you need to do is contribute to the running of the vehicle and the so called FBT ( a calculated value) can be reduced to zero. This means that you have a pre-tax cost and a post tax cost. The cost of which is less (ie more cash in hand) than pre-tax contributions alone.

You need to do the figures, however, easiest way to think about it is that FBT is at roughtly 48 cents in the dollar. Equal to about marginal rate. If you earn less, you can contribute to running the vehicle, offsetting the costs and therefore converting the 48cents in the dollar "tax" to a lower rate in the dollar "tax". (i.e a saving). :D There are leasing sheets, however, they do not factor this in very well. Ask about the pre and post tax contributions before taking up a lease.


First up, thanks to all for the great advice - it played a major part in my going the sal sac route, and getting a new car for my wife as a Xmas pressie. She is now one very happy lady, and the SS now sits snuggled up out of the weather...

I ended up using the option discussed above LTDCV8R (thanks mate!!!) as it also allowed me to build up a balance in an account which could be useful down the track. The lease is only for three years (something I was after) with a very reasonable residual.

She has already done over 1500 km's in 2 weeks, and that's not driving it everyday!!!

[Goggles]

I have my current SS under a novated lease for 2 years.

I presume that I cannot change cars now? There are a few low km VZ SS around for a reasonable price.

[jneil]

I have my current SS under a novated lease for 2 years.

I presume that I cannot change cars now? There are a few low km VZ SS around for a reasonable price.

I'd would think that you presume wrong!

With my Novated lease, I just pay out what is left on the lease and the residual, then either sell it or trade it for a VZ. I wouldn't do this as it wouldn't be worth it until VE or VEII (or whenever LS2 comes out) though.

[Goggles]

I'd would think that you presume wrong!

With my Novated lease, I just pay out what is left on the lease and the residual, then either sell it or trade it for a VZ. I wouldn't do this as it wouldn't be worth it until VE or VEII (or whenever LS2 comes out) though.

To change, I would have to get the approval of the "boss." Tempting as it is, I think I will wait until the LS2 comes out.

It appears from this thread, it may be sooner rather than later:
http://www.ls1.com.au/forum/showthread.php?t=33797