Is a luxury car novated lease the right choice for you?

If you're in the market for a luxury car, you may be wondering if using your pre-tax income and a novated leasing option is right for you. Here, we'll outline some of the pros and cons of novated leasing a luxury car so that you can make an informed decision.

Novated leases can offer many benefits, particularly when it comes to tax savings. You can deduct your monthly repayments from your taxable income, which could lead to significant savings over the life of the lease. Additionally, novated leases can offer flexibility in terms of mileage and contract length, which can be important factors when choosing a luxury car.

However, there are some downsides. In particular, a novated lease for a luxury car may be more expensive than a traditional lease, and you may be required to make a large residual payment (or balloon payment) at the end of the agreed term. Additionally, novated leases can be complex, so it's important to understand all the terms and conditions before signing on the dotted line.

Ultimately, whether or not leasing a luxury car is the right choice for you will come down to your individual circumstances. If you're looking for flexibility and tax savings, a novated lease could be a good option. However, if you're on a tight budget, a traditional lease or car loan may be a better choice.

What is a novated lease?

A novated lease is a type of car lease which offers tax advantages and flexibility in terms of mileage and contract length. Your employer pays for your car lease by deducting payments from your pre-tax salary by way of a 'salary sacrifice'. As the employee, you will be responsible for paying the lease in full, including guaranteeing the full residual payment at the end of the contract. This 'balloon payment' can be made from your own cash savings or by taking out finance to cover the remainder of the purchase price.

What are the advantages of leasing a luxury car?

While a novated lease can be more expensive than a traditional car lease, it can be a cost- effective way to buy a new or used car as it effectively reduces the amount of your taxable income. Some of the other benefits of a novated lease include:

• Your luxury car doesn't need to be used for business purposes, so this type of lease isn't just available to employees needing a vehicle for work.
• You'll generally have lower monthly payments than if you were to finance the purchase of a car. Additionally, leasing gives you the opportunity to drive a brand-new car every few years - perfect for those who like to keep up with the latest trends.
• You don't need to worry about upfront capital with a novated lease - you will pay a fixed monthly payment and at the end of the term, you can choose to refinance the balloon payment by way of a more traditional loan.
• With some car leases, you can include fuel, repairs, maintenance and even insurance and registration in your lease payments.

What about the disadvantages?

Novated leases come with some downsides. In particular, if you are looking at leasing a luxury vehicle, it's important to weigh these up before you sign any contracts.

• There may be fringe benefits tax (FBT) implications. To find out more about these implications, visit the ATO - Car Leasing Fringe Benefits and make sure you speak with your tax agent.
• You don't own the vehicle so there may be restrictions on mileage and modifications that can be made to the vehicle - always check your contract as you may be limited on the number of kilometres you can travel, and you may face a monetary penalty if you go over this allowance or if the vehicle is not returned in good condition.
• Paying off the balloon payment or residual value may be difficult - when it comes time to pay the final balloon payment, you may not have the funds available and have to take out a loan to cover the payment.

Considering a luxury car lease in Sydney?

While we have focused on a novated lease for employees, businesses, and self-employed, sole traders, can also benefit from a car lease. It can be an affordable option for a business, with limited trading history, who may not meet a lender's criteria for a more traditional loan. With fixed monthly repayments, it can assist small business with cash flow and budget and doesn't tie your cash up in a depreciating asset.

Conclusion

When it comes to choosing a luxury car, there are a lot of factors to consider including if you should lease or buy, so do your research! If you decide to lease, you should consider comparing offers from multiple dealerships and make sure you read the fine print carefully before signing a contract. If you are considering a luxury car lease in Sydney and still have questions, give one of our experience brokers at Finance Brokers NSW a call and we can assist you make the right choice for your own individual circumstances.