Novated Leases and new Tax Rates

[chook]

Hi All,

As the new Tax rates are out, has anyone gone through the exercise with novated leases to see if there still a viable option in Salary packaging. My limited understanding is that it would not be as beneficial as it was pre July as the FBT is still charged at the top tax rate ANyone been through the exercise yet. My lease expires in 4 Months, not to mention resale values on Large cars at the moment.

[phat-dave]

im in the 30% bracket and whilst there was no direct tax benefit as such, it still worked out that the running costs were effectively free (of course this isnt the case, but you know what i mean opposed to normally operating a vehicle etc)

fbt is down 2% too i believe - for me it was worth it for the upfront fleet discount + cheaper running costs

[Veeate]

I novate my VZ Clubbie and have done for my past few HSV's. While the lease companies will present you with all kind of data to show huge savings i think personally the days of Novated leasing saving you huge amounts of money are over......and have been for a while.

Depending on your salary and other personal financial criteria it may save you money through reducing your tax into a lower bracket. Unfortunately for me this does not apply.

The only real benefit i get is that all the costs associated with running a car i.e petrol , tyres , maint , insurance etc are all covered and all i see is my monthly deduction out of my salary. Previously i had to come up with $2000 every 12 months for insurance and that used to hurt. Not to mention every year i would have the same 'discussion' with the missus about how expensive these cars are to run. Now i just have one 'discussion' with the wife at lease time, go through the begging process once and then i don't worry about it for another 3 years !!!!

I like the convenience of a novated lease but i don't think it saves me any money in the long run.

[jneil]

Very good question chook!

I used to have fully maintained operating leases and got major discounts on the car ($38k for a VYII SS with sunroof!), BUT IT WASN'T MINE, It was in the companies name. Now I have changed companies, purchased it from the old company for a cheap as price and changed it to a Novated lease (in my name) as I wanted to keep it. I also now have a "car allowance" component that isn't taxed so that adds into my equation also.

I still have over a year to go, but depending on the effectiveness on another Novated lease I may elect to spend some cash on this one, keep it for a few more years and do some circuit racing (brakes, spare rims/tyres, PS cooler, etc.).

I don't want to spend the cash on a few more upgrades if I am going to change over to a new 3yr lease next year as I'll save more for a Clubby this time.

too many questions...so little answers :errr:

Jeff.

[boofhead]

I have a Excel spreadsheet which models the impact of the lease and changes in tax rates, salary etc - this means that you can model say a novated lease vs other purchase options and see the impact on your monthly salary (mine is based on over 15,000km per year for the FBT)

Worth spending some time to do this - also can model the impact of not meeting the 15,000km (did that a couple of years ago and had to hand over a few $$$$$ back to the company)

Looking at it this time around it is marginal but still cheaper than other options - my biggest concern about another lease is probably;

1. Will I be able to sell the VY SS Series II to cover the residual

2. What the resale value of a VE Calais-V or SS-V will be like in 3 years

Cheers,

[swingtan]

I have a Excel spreadsheet which models the impact of the lease and changes in tax rates, salary etc - this means that you can model say a novated lease vs other purchase options and see the impact on your monthly salary (mine is based on over 15,000km per year for the FBT)

Worth spending some time to do this - also can model the impact of not meeting the 15,000km (did that a couple of years ago and had to hand over a few $$$$$ back to the company)

Looking at it this time around it is marginal but still cheaper than other options - my biggest concern about another lease is probably;

1. Will I be able to sell the VY SS Series II to cover the residual

2. What the resale value of a VE Calais-V or SS-V will be like in 3 years

Cheers,


Nice to hear you have gone to the trouble of creating a spread sheet.... Any chance you'd like to share it with the rest of us ? I was going to do that but if I can get out of doing the hard work, well you know. I'm currently Novating he VZ SS and I think it works out fine, mainly because I don't have to borrow the money to buy the car in the first place ( or draw back on the house loan ). If I was to take out the interest payments on the purchase, I think the novate would be more expensive.

Simon

[RICHO]

If you want to have a look at offordability, Orix have a great Novated Lease calculator on their website:

www.orix.com.au

Let's you play around with salary levels, residuals, kms, whether you want tyres, servicing etc included, petrol types, replacement tyres etc. Then provides you the the difference in net income of personal finance (using the same assumptions as for your lease) and a salary packaged (novated) option.

Worth a look if you want to crunch the numbers.

[ADSXR8]

Hi All,

As the new Tax rates are out, has anyone gone through the exercise with novated leases to see if there still a viable option in Salary packaging. My limited understanding is that it would not be as beneficial as it was pre July as the FBT is still charged at the top tax rate ANyone been through the exercise yet. My lease expires in 4 Months, not to mention resale values on Large cars at the moment.

My advice would be, seek professional advice.

Generally your personal tax accountant knows your position and can provide bext assistance, or from my experience, my employer paid for me to see there accountants.

[Goggles]

the thing that I have found that helps me in my novated lease is paying the fbt value per fortnight using the employee contribution method (ecm). it was recommended to me to do that, as it will be a requirement after 1 July 2007 anyway.

bottom line is that with the novated lease, my effective gross income has dropped, and therefore my wife and I have become "more" eligible for government benefits. ridiculous I know, but the truth.

the bottom line (as discussed in another thread on this forum) is to watch out for the term of the lease, and the expected residual value. I was caught out with my old VYII SS (it was leased for 2 years), but I think (I hope) that I will be better off with my VZ SS as it leased over 5 years.

[jaykay]

the thing that I have found that helps me in my novated lease is paying the fbt value per fortnight using the employee contribution method (ecm). it was recommended to me to do that, as it will be a requirement after 1 July 2007 anyway.

bottom line is that with the novated lease, my effective gross income has dropped, and therefore my wife and I have become "more" eligible for government benefits. ridiculous I know, but the truth.

the bottom line (as discussed in another thread on this forum) is to watch out for the term of the lease, and the expected residual value. I was caught out with my old VYII SS (it was leased for 2 years), but I think (I hope) that I will be better off with my VZ SS as it leased over 5 years.
As long as you want to keep your technology 5 years.

The trick I believe is to set your residual low at the end so the issues with shortfall like the used car market is experiencing at the mo doesn't happen. Pay more per month and keep the residaul down to cover fluctuating markets. If the market improves you have a win, but if it reamins low you are covered. Trick is to stick to the lease term, something I'm struggling with now the VE is out.... :mad:

[Goggles]

Trick is to stick to the lease term, something I'm struggling with now the VE is out.... :mad:

I can relate to that as well.....but so far have not been tempted as the losses would be horrendous

[Smitty]

As Fleet Manager for my mob
I have just done this exercise for more than 30 employees:eek:
and yes I have spreadsheets, Tax Office info and stuff...
lotsa stuff from so called remuneration experts

now? with the tax rate changes
basically novated leases work..if your total salary..package
...remuneration is at least $75000
under that ..it gets messy and only works in certain circumstances

You have to be careful..the gross up rates for Taxable value calcs
have changed, see -
http://www.ato.gov.au/corporate/content.asp?doc=/Content/76140.htm

and don't forget that the car value DOES appear on your Payment Summary
which affects Medicare, HECS Family Benefits etc...

hth

cheers

[Smitty]

snip...
The trick I believe is to set your residual low at the end so the issues with shortfall like the used car market is experiencing at the mo doesn't happen. Pay more per month and keep the residaul down to cover fluctuating markets.


I have to say..this won't work
why..???
coz the Tax Office have increased the effective life of cars
under novated leases
and so REDUCED the depreciation allowed to leasing companies
under leases
the result???
I am now getting vehicles quotes where the residuals are HIGHER
than they were for 4 years terms
and the only way I can get residuals lower
is to have cars on 6 year leases:flamin:

[Dacious]

As I said in other posts, this altering of tax rates now tips the balance back for many people below $80K in favour of personal finance, at least until interest rates go up.

Short term, this is bad for carmakers and those involved in the leasing business. Longterm it should trend resales upwards, especially for good product.

[muzza]

The main thing Novated Lease people should be looking at is whether to use the ECM (if you aren't already).

I know that people who work for charities, in health or education who get either FBT exemption or rebated FBT will not be so affected, however with the drop in marginal rates the ECM may become useful. I am certainly examining it at the moment.

As stated earlier, all your running costs are effectively net of GST (as long as your employer gives you back the input tax credits) and tax-deductable at your top marginal rate (but you pay FBT of course, which claws some back to the gov't).

Smitty - bad news on the allowable depreciation change - I assume this applies to new leases from July 1?

[VX2VESS]

Calculator for $40K car, = $1,500 plus salary sac pm over 4 years, bugger that...comparison is to a financed car does looks ok at that, except if you don't finance it.

[RICHO]

To provide some context:

Have run some numbers to put some perspective into the difference that salary levels can make to the effectiveness of Salary Packaging (novated lease). Have used the following assumptions:

Base Assumptions
$35,000 car
Imported (have used and Astra Sri Turbo)
Premium Fuel
Victoria
48 Months 30% Residual
20,000km per annum
Assumes that the car would otherwise be fully financed
Assumes that the car is primarily for private use

Costs to be "financed through the lease"
- Registration and Third Party Insurance
- Stamp Duty and Transfer fees
- Fuel Costs
- Maintenance & Servicing
- Novated Lease Insurance / Protection
- Insurance

Salary sacrifice results in the following savings after tax over a 12 months period. (i.e. the amount he have to spend after outgoings)

Salary = $50,000, $190 better off each year
Salary = $75,000, $190 better off each year
Salary = $90,000, $1,609 better off each year
Salary = $125,000, $2,201 better off each year

Clearly as a few have said, it is marginal for many people earning less than $80k as tax bracket changes have lessened the impact of reducing taxable income.

[AndrewW]

this has become more complicated since Johnny and Pete started mucking around with the tax brackets, and people (like me) ended up moving from the 47% to 30% bracket, with FBT still calculated at 47% (yeah I know, 47 is now 45 ...)

Anyhow, I recently did the maths again and determined that I could save over $800/year simply by taking the fuel allowance out of the lease and paying for fuel with after tax money. The money spent on fuel can then be claimed as an employee contribution, and effectively reduces the FBT liablity to zero. The saving is due to the difference between my marginal rate and the FBT rate.

I've been creating spreadhsheets for these calculations for years, that Onix one seems way too complicated, and makes too many assumptions.

I've done the maths on a new VE SS, and assuming that I can get a discount similar to what I got on my VY, then its upgrade time for me :)

Andrew.

[AndrewW]

Clearly as a few have said, it is marginal for many people earning less than $80k as tax bracket changes have lessened the impact of reducing taxable income.

What your calculations don't take into account is that by salary sacrificing the car and reducing your effective taxable income, the amount of Family Tax Benefit those of us with kids are elgibile for skyrockets ...

[Goggles]

What your calculations don't take into account is that by salary sacrificing the car and reducing your effective taxable income, the amount of Family Tax Benefit those of us with kids are elgibile for skyrockets ...

very true.........much to my surprise :)

[Dacious]

When I leased my Monaro I was about $5K a year better off, even taking into allowance that it was a two-year lease with a higher contribution rate to ensure a lower balloon. Because the car cost the lease $51K on the road with Telstra absorbing the GST, my balloon was $31K

Compared to taking a personal loan at 10% for five years I was basically ahead my running costs, insurance, rego, maintenance and fuel. I got my final statement from the lease the other day and the fuel use was higher, seeing as I'd calculated $1.16/litre a the time, but was counterbalanced by lower servicing and other costs.

Including the FBT liabilty, which was marginally more than the lease cost, My taxable income was reduced to just below the marginal tax threshold.

If I ran those numbers again today now I'm not above the threshold, I'm sure I would not be ahead, even allowing 100% GST absorption by employer.

We're shortly going to renew the missus' car. Even though she can lease through her employer, I think we'll be trading/paying cash for her newie.

[Smitty]

...snip...
Smitty - bad news on the allowable depreciation change - I assume this applies to new leases from July 1?

yes mate

the new tax rates apply from July 1
and so do the new Tax Office rates for depreciation


hth

[SSBarney]

What your calculations don't take into account is that by salary sacrificing the car and reducing your effective taxable income, the amount of Family Tax Benefit those of us with kids are elgibile for skyrockets ...

Family Tax Benefit calculations include your reportable fringe benefits. So unless ur PAYG summary is incorrectly filled in, ... no skyrocket.

[Goggles]

Family Tax Benefit calculations include your reportable fringe benefits. So unless ur PAYG summary is incorrectly filled in, ... no skyrocket.

but if you use the ecm, then the reportable fringe benefit is 0.

[SSBarney]

but if you use the ecm, then the reportable fringe benefit is 0.

Its not a case of "if" u use employee contributions in ur calculation, it IS a part of the calculation, no option. What happens is many people on salary sacrafice etc, fail to reduce the FBT to what it should be by including all of their own expenses into the equation. I guess this happens because of the seperation between employer and employee payments, or failure to get decent advice.

Employee contributions may or may not reduce the reportable fringe benfits amount to zero depending on how much was spent by the employee, obviously those with full running costs in teh lease will have sweet F all in employee contributions.

[BLOWN_R8]

Hi Everyone

I am 2 years into a 3 year lease and have to say I had not thought about the effect of bracket changes on novations. I am on the maximum tax rate and as such every little bit helps. But I do love getting one monthly bill whilst haviong the pleasure of driving around in a 850Hp supercharged R8!!!

Cheers
DK

[AndrewW]

Employee contributions may or may not reduce the reportable fringe benfits amount to zero depending on how much was spent by the employee, obviously those with full running costs in teh lease will have sweet F all in employee contributions.

My employer is very flexible on lease arrangements, so all I do is pay for my petrol out of after tax dollars, keep a track of the expenses, and once I've spent enough to cover the FBT amount, I start using the fleet card and paying for the fuel out of pre-tax dollars.

result: 0 FBT payable, and I maximise the tax benefits of the lease (plus the Family Tax Benefits as previously stated).

btw, I didn't use the term skyrocket lightly. I have two cars on novated leases, and between the two of them it brings our family taxable income down by $25K. This does have a considerable impact on the entitlements to FTB ...

[COSMOS]

i need a better accountant - am on the top tax rate and my wife doesnt work. We lease the Vectra on a 2 yr lease (its my between commodores car) and I have 16mths left on the lease.

Who can I speak to in Sydney who can assist with structuring this in the most cost effective way possible. We get $0 on the part A FTB and $120 per fortnight on the FTB part B.

Lease is with SMB who dont really offer much advice - they sent me a calculator to see if the ECM was better which it wasnt. So I am paying $4k approx in FBT which I want to see if I can reduce on the lease.

Hmm and now I am getting tempted by the VE and thinking of changing already which I know will be a killer because i did that with the VYIISS and lost 7k between sale and payout $$$$.

[PepeLePew]

Interesting to play with the FTB calculator on the ATO site. I was concerned that my new vehicle, which costs me less that my old one, and some restructuring of how my salary is paid to me (car allowance lumped into general salary) was going to affect the FTB, but whatever sal bracket I appear to be in the numbers arent moving a dollar even playing with the figures up and down....

http://ato.gov.au/individuals/content.asp?doc=/content/10712.htm&pc=001/002/046/001/002&mnu=6864&mfp=001&st=&cy=1

[SSBarney]

Interesting to play with the FTB calculator on the ATO site. I was concerned that my new vehicle, which costs me less that my old one, and some restructuring of how my salary is paid to me (car allowance lumped into general salary) was going to affect the FTB, but whatever sal bracket I appear to be in the numbers arent moving a dollar even playing with the figures up and down....

http://ato.gov.au/individuals/content.asp?doc=/content/10712.htm&pc=001/002/046/001/002&mnu=6864&mfp=001&st=&cy=1

Maybe u are already over the thresholds, or not moving it enough to change it. Once you get over the low thresholds u get a minimum payment until u exceed the top threshold, so it can cover a large bracket.
The thresholds are here http://www.familyassist.gov.au/Internet/FAO/fao1.nsf/content/payments

[CV8Monaro]

I run a VZ Monaro on a novated lease with SMB. Although I am not in the top tax bracket I still save about $5000 per year by using a novated lease and salary sacrificing using the ECM. You must be doing 25001+ kms per year to get the best tax benefits.

Another consideration is the discounts when it comes to servicing and maintenance thru a lease company. The Monaro had a 30,000 service which cost $140...my wifes Astra cost nearly three times that for its 30K service from the same Holden dealer!

I've only taken out a two year lease because my thoughts are that when it comes to the end the car will still be under new car warranty and hold its value better. I know the Monaro is an exception as it is a collectors item, but I will be selling next April and getting a VE SSV. I will probably get around $50k for the great car when I sell it, and even after the residual pay out the bottom line is the car will have cost me $120 per week all inclusive!!

[lukey73]

Why you going with SMB ?? Have you tried Fleet Solutions they are pretty good. My old Man has a Subaru thorough them and gave him a much better deal than SMB offered.

He is looking at upgrading to a new SS-V, think he is upset that i got a Clubsport before him !!:cool:

[PepeLePew]

Maybe u are already over the thresholds, or not moving it enough to change it. Once you get over the low thresholds u get a minimum payment until u exceed the top threshold, so it can cover a large bracket.
The thresholds are here http://www.familyassist.gov.au/Internet/FAO/fao1.nsf/content/payments

Hey thanks mate...only saw this today. Digging up info from guvmint websites is a PITA at the best of times :)

[Tez82]

My god I have been hit with new freaken tax as well GRRRRRRRR its costing me extra $570 a month after tax.. I sooo didn't know about this hehehe, oh well might have to buy out the Landcruiser now and just bill the company for it...

Lesson learnt, remember to read the fine print :p

[Goggles]

My god I have been hit with new freaken tax as well GRRRRRRRR its costing me extra $570 a month after tax.. I sooo didn't know about this hehehe, oh well might have to buy out the Landcruiser now and just bill the company for it...

Lesson learnt, remember to read the fine print :p

that's odd, even with the new tax rates etc, my after tax pay has not changed. having said that it is probably a little bit murky as I changed jobs recently and my pay is higher....but still not in the top tax bracket.

[Tez82]

Yeah not too sure whats happened... cause its being treated as a different item. On my payslip its coming up as a deduction on my net pay... Gotta work out wat lease company has done, its through lease express so not too sure whats going on there :p

[PepeLePew]

Sounds like your pay office has co*cked up

[LTDCV8R]

Remember guys, you can not just salary sacrifice for the entire lease cost but can pay a proportion from after tax salary to off-set the FBT amount. This can be very beneficial for someone that is below the top marginal tax rate.

Can be used by all for a benefit if structured properly.

[phat-dave]

nice thread mining there :jester:

the contribution youre referring to though is only applicable if your employer allows it... i believe its called the employee contribution vs novated statutory and its only applicable to the running costs of the vehicle... my understanding is that if the lease company estimates running costs of $5k/pa then you can elect to pay half pretax and half post tax which will effectively lower your fbt liability.... (or all of it if you want etc)