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'Novated Lease'

A 'Novated Lease' consists of a simple 'Finance Lease' accompanied by a 'Novation Agreement' which binds yourself and your employer to the financier to make repayments on the loan out of your gross salary, the money that you spend on the vehicle is therefore is not taxed.

The vehicle under this Novated Lease agreement is effectively provided for you by your employer, even though the repayments are coming out of your income. You may have to pay FBT (Fringe Benefits Tax) which may or may not make a Novated Lease better for you. FBT is calculated based on the amount of kilometres you travel in the FBT year, esentially the more Kms you travel, the lower the FBT.

Certain commercial vehicles are exempt from Fringe Benefits Tax, this may give you a considerable tax advantage under a Novated Lease arrangement.

If the type of vehicle you lease is not FBT exempt, you can offset your FBT by making 'Employee Contributions' out of your net income. This means paying for certain operating costs of the vehicle, including fuel, maintenance, tyres, etc.

Every dollar you spend on running costs removes one dollar of FBT, so if your FBT amount for the year was $2,000 and you spent $2,000 on running costs, you would not owe any FBT for that year.

It is important to note that at 'Novated Lease' is still essentially a 'Finance Lease' and as such still consists of a residual value and a monthly installment plan.

Because a Novated Lease involves the financier purchasing the vehicle on your behalf, the finance company claims back the GST component meaning that you only need to effectively borrow the price of the car minus the GST component. This is how another way a Novated lease can save you money over the course of the loan as opposed to financing the full amount.

A Novated Lease also consists of a residual value which must be paid to the financier at the end of the loan. The minimum residual value is set by the Australian Taxation Office meaning that you may not have a lease with a residual lower than the ATO sets out.

Novated Lease payments incur GST however this can be claimed back by your company depending on your situation.

The residual component must be paid at the end of the Noease to the finance company, however you may sell the asset to recoup the money owed and then pay the residual out.

Advantages:
1. The finance company claims back the GST meaning you only need to borrow the GST exclusive amount, this will save you on interest.
2. Your entire payment will be deducted from your Gross Income which will reduce your income tax
3. The GST component on the payments may also be claimed back

Disadvantages:
1. You can not put in a deposit as such on a Lease, you can however have substantially larger first payment subject to certain conditions.
2. You can not trade in a vehicle on a Lease
3. You can not have a zero residual, your residual must be equal or greater than the residual component set out by the ATO.
4. You may be charged Fringe Benefits Tax depending on the type of vehicle you purchase

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Please note that the above information is factual only and does not take into account your personal financial situation. For any advice relating to financial matters always seek the advice of a professional who will take into consideration all factors relating to your situation.