Car loan vs novated lease in Australia

Novated leases have a cult. Someone at work got a car 'through pre-tax' and now the whole open-plan wants a brochure. A novated lease is a three-way agreement: you, your employer, a financier. Salary is sacrificed, running costs can be bundled, and fringe benefits tax (FBT) rules — including the electric-vehicle exemption that has driven much of the recent boom — do a lot of the heavy lifting.

A car loan is a two-way credit contract. You borrow, you own (subject to security), you pay after-tax. Comparing them on 'weekly cost' without FBT, residual, and job risk is how cults form.

What a novated lease is doing

The financier buys the car. Your employer deducts lease and (often) running-cost amounts from salary. A manager (the packaging provider) pays fuel, servicing, tyres, registration from the budget. If the budget is wrong, you top up. If the budget is fat, you might get a surplus. At the end a residual (balloon-like) is due.

The tax win, when it exists, comes from paying with pre-tax income and from FBT treatment. Electric vehicles have, in recent policy, enjoyed FBT exemption under conditions (price caps apply). Those settings can change in a budget. Do not sign a five-year lease on a tax rule you have not checked this year.

What a car loan is doing

You take credit, the car is (usually) security, repayments are after-tax, you manage fuel and servicing yourself. No employer. No residual unless you choose a balloon loan. Change jobs tomorrow: nothing happens to the loan.

That boredom is worth a lot if you are on a two-year contract, work labour hire, or are about to parental-leave out of the packaging employer.

Residuals are not decoration

The ATO publishes residual value guidelines that novated leases follow so the lease is not a sham. A high residual makes the during-term deductions look pretty and leaves a lump at the end. If the car's market value is below the residual, you are writing a cheque to own a depreciated asset. That is the same family of risk as a balloon on a consumer car loan.

Ask for the residual in dollars, not as a vibe. Ask what happens if the market is lower.

Running-cost budgets

Packaged fuel is not free fuel. It is your salary, pre-tax, in a bucket. If you drive 8,000 km and they budgeted 20,000, you have frozen too much salary. If you drive 30,000, you will top up after-tax. Be honest about kilometres.

Insurance inside a package should be compared with your own comprehensive quote. Sometimes the package wins. Sometimes it is lazy.

FBT and EVs

If you are looking at a petrol family wagon, FBT can eat much of the novated magic unless your employer has a specific method that still works for your pattern of use. If you are looking at an eligible EV under the cap, the exemption may make novated look excellent. Model both with a specialist who is not paid only if you sign, if you can find one, and read the ATO page yourself.

This is not tax advice. It is a warning that the EV brochure and the petrol reality are different products.

Worked comparison (illustrative)

$50,000 EV, 4 years. Loan 7.5 per cent, $10,000 deposit, no balloon, after-tax repayments plus your own energy costs. Novated: lower apparent fortnightly deduction, residual $18,000, packaging fee, employer must continue. If you stay in the job, keep the EV exemption, and the residual matches value, novated can win. If you leave in month 14, the win can reverse in an afternoon.

Questions to ask the packager

• FBT treatment this financial year, in writing.
• Residual dollar figure and ATO rate used.
• What happens on resignation, redundancy, unpaid leave.
• Early termination formula.
• What is in the running-cost budget, and the reconciliation process.

A novated lease is a workplace product. A car loan is a credit product. Choose the category first, then the deal. If your employer does not offer novation, you do not have a puzzle; you have a car loan decision.

Redundancy and parental leave

Unpaid leave can break a novation even if you still have a job. Ask HR and the packager together, not separately, so the stories match. Redundancy is a payout-or-takeover event. If you are in a shaky industry, a consumer car loan's boredom has a dollar value.

Mileage honesty

The running-cost budget is a forecast. If you are a regional nurse driving 35,000 km, do not sign a 15,000 km budget because the fortnightly number looked pretty. You will top up after-tax and be annoyed.

End-of-lease condition reports

Novated returns can get as fussy as rental-car counters. Budget for tyres and windscreen before the inspection. Residuals plus fair-wear bills are how a 'cheap' lease grows a tail.

A redundancy rehearsal

Ask: if I am made redundant on 1 July, what is the payout figure on 15 July, and what does taking the lease personally cost per month after tax? If the packager cannot answer, you do not understand the product yet. A car loan's redundancy rehearsal is: nothing happens to the contract except you still owe it, which you already knew.

Write the answers in the same folder as the residual. Future-you in a HR meeting will not remember the seminar.

Electric-vehicle policy risk

FBT exemptions have been generous and political. A lease that only works because of this year's exemption is a bet on a budget. If you like the EV anyway and would buy it on a loan, novation may still be a tax-efficient way to hold it. If you would not buy it without the exemption, you are a policy customer. Policy customers get surprises.

Documents to bring, and a last caution

When you sit down with a lender, broker, packager or yard manager, bring the packager's residual in dollars, HR's redundancy rules, and an after-tax car-loan quote for the same vehicle. If they will not look at paper, they are selling speed. Speed is expensive in Australian credit.

Write down the thing you are afraid to ask — the fee, the balloon, the HELP treatment, the break cost — and ask it first, while you still have the nerve. The second conversation is always weaker. If the answer is vague, you do not have an answer.

This desk would rather you delay a week than sign a contract whose comparison rate you cannot explain to a friend. ASIC's MoneySmart remains the public-interest spare brain: use it the night before, not the morning after. And if the product only works on overtime that is not in your contract, it does not work. Buy a smaller thing, or wait. Waiting is still allowed.