Novated or Associated leasing?

Everyone has heard of novated leasing. Buy a car, finance it as much as possible out of your pre-tax wages ... and reap the benefits.

But have you heard about associated leasing?

It's like novated leasing, but doesn't get the same limelight.

Why is that exactly? Because fleet management companies promote novated leasing, since they make a dollar from that. They don't make big bucks out of associated leasing.

In essence, associated leasing works like this: You still sacrifice part of your wage to pay a lease for a car, but your 'associate' is the legal, registered owner of the vehicle. As long as the associate – usually a family member – is not sharing a joint bank account with you, but has his or her own ABN, it's all perfectly legit.

Often the associate has a lower income than the employee but this is not necessary for an Associate Lease to be effective. Obtaining an ABN (Australian Business Number) costs nothing, and the associate can be a family company or family trust as well as an individual relative. Individuals qualifying as associates include spouse/partner, sibling, parent, dependent child (over 18).

The advantage to the salaried employee is use of a vehicle (for the whole family perhaps), tax minimisation and lower running costs over time. Unlike novated leases, associated leases are not restricted by the policies of fleet managers. Buyers can purchase new or used vehicles of any age, either unencumbered or subject to finance. Vehicles can be passenger cars licensed to carry fewer than nine occupants, and goods-carrying vehicles rated at less than a one-tonne payload.

An associated lease may be an effective solution for a family with the bread-winner taking public transport to work and the stay-at-home care-giver taking out finance on the family car. If the breadwinner earns $100,000 and the family car – worth $20,000 market value – is registered in the name of the care-giver, a $10,000 loan taken out with the car as collateral could conceivably earn the associate (the 'care-giver') $11,761 – of which just $2036 would be taxable. And the bread-winner (employee) would save tax in the amount of $2805.

What is novated leasing anyway?
You're an employee entitled to 'salary sacrifice' a component of your wage to buy a new car of your choosing. This is effectively a cheaper way to finance a new car, by reducing the overall tax you pay each year of the vehicle lease.

The car you buy is your car. It's not a company car, despite your employer making payments on your behalf to the fleet management company. Those payments do come out of your gross salary, after all.

The car is considered a 'fringe benefit' by the Australian Taxation Office (ATO). The challenge for the employee and the fleet management company administrating the novated lease is to save the employee money, reduce his or her total tax burden and (in the case of the fleet manager), turn a profit.

Since April 1 this year, the fringe benefits tax (FBT) payable on all cars financed using a novated lease is based on 20 per cent of the vehicle's value. Previously, owners were required to keep a logbook and the kilometres driven would determine the rate at which tax would be calculated. The further you drove the lower the tax. Individuals would drive to a far-flung place interstate and back in three or four days solely to reduce the tax paid. Under the new regime, there is no longer a need to keep logbooks or travel extended distances to avoid tax, as all novated lease vehicles are assessed at 20 per cent of the car's 'Base Value' .

The FBT charge incurred can be offset – dollar for dollar – by running costs paid out of post-tax salary. Running costs comprise not only expenses in the form of servicing and consumables, but the actual finance repayment as well.

So the fleet manager will calculate a budget for the employer and employee, by which the after-tax contribution is equal to the 'taxable value' of the car. The taxable value is 20 per cent of the total purchase price including dealer delivery, GST and Luxury Car Tax, but not registration and stamp duty.

As long as the after-tax component deducted from the employee's pay equals the taxable value of the car, FBT is minimised to zero and the balance of running expenses can be deducted from pre-tax pay – affording a tax reduction measure.

Here's one example of how this would look if you are purchasing a $30,000 car and receiving a gross wage of $60,000:

The finance payment - $7652
Servicing - $700
Tyres - $400
Registration/Compulsory third party insurance - $976
Comprehensive motor vehicle insurance - $900
Fuel - $3000
Roadside assistance - $80
Fleet management administration fee - $240

Total running costs - $13,948

Since the car's base value was $30,000, its taxable value would be $6000. Subtracting the $6000 after-tax component from the employee's wages leaves $7948 payable from the employee's gross (pre-tax) wages. But there's also a GST component paid for the finance on the car, taking the total, pre-tax expenses up to $8494.

Comparing the tax advantage of a novated lease against that of a conventional lease serviced fully from after-tax wages – as in this specific example – yields an annual 'increase' in after-tax salary of $3168, or 9.5 per cent.

The amount payable to lease the car, without drawing on the tax savings of a novated lease, would be $14,276, deducted from the employee's net pay of $47,753, and leaving a final, take-home annual pay packet of $33,477.

In contrast, the net salary with the novated lease is only $42,645 – because the gross salary has already had the vehicle's running costs deducted (less the taxable value of the car), before PAYG tax has been deducted. But the PAYG tax is lower ($9557 novated, versus $12,247), and the after tax costs for the novated lease amount to just $6000 – being the taxable value of the car.

If you're a salaried employee on $120,000 a year gross, and you take out a novated lease for a $60,000 car, the tax saved is $5510. That amounts to 9.0 per cent of the net salary if you had bought a car on finance, without a novated lease.

Novated leasing is viable for most people, irrespective of their wages, provided the car is relatively affordable and the employer is open to the idea. One convert to novated leasing, ironically, has been the ATO itself.

Initially sceptical of the whole idea, the tax office approved novated leasing in its public ruling IT2509, dated November 17, 1988. Since that time the ATO and other Government Departments have included a Novated Lease as an option for their employees. Today almost every major employer in Australia allows their employees to take advantage of the savings made through Novated Leasing.