Leasing V Owning

Submitted: Friday, May 23, 2003 at 22:16
ThreadID: 5090 Views:2579 Replies:11 FollowUps:21
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Hi all...I'm currently looking at doing a novated lease of a NP Pajero...any comments as to whether a lease or outright purchase is the better way to go? There are lots of benefits, but lots of pitfalls too.... Cheers
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Reply By: Brad - Friday, May 23, 2003 at 23:02

Friday, May 23, 2003 at 23:02
Recently ' leased ' a 4wd myself. It seemed to me in the end its just another way of borrowing money, which is to say if you have sufficient cash to not have to borrow than pay cash. If you have to borrow, than just look at the interest rate that the lease provider is offering and compare to other finance providers (eg banks), and borrow from whoever is offering the best terms for the conditions you want. I couldn't see any particular 'special' benefits from leasing otherwise. Please correct me if I'm wrong.
Regards,
Brad.
AnswerID: 20895

Follow Up By: Jazz - Friday, May 23, 2003 at 23:16

Friday, May 23, 2003 at 23:16
Novated leases allow for a large component of the lease costs and running costs to be paid by pre tax income, reducing the amount of tax paid...that's the main benefit. Most running costs are also provided at wholesale cost (eg, fuel, servicing, tyres, etc).
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Follow Up By: GaryInOz (Vic) - Saturday, May 24, 2003 at 19:31

Saturday, May 24, 2003 at 19:31
Be aware that novated leases insurers expect to have the vehicle maintained and returned in the same condition it was leased in - NO MODIFICATIONS, NO OFF-ROAD, ETC. Read the fine print VERY carefully. It is a LEASE first and foremost, with the option to pay the balloon payment at the end of the lease to transfer ownership to you.

Caveat emptor....
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Follow Up By: Member - Rohan K - Monday, May 26, 2003 at 11:06

Monday, May 26, 2003 at 11:06
Jazz, don't forget the FBT "hit". With the significant increase in the FBT gross-up rate a few years back, any real tax advantage has been removed or considerably reduced, depending on your tax bracket. My first lease ('97 to '01) was worthwhile, and I came out in front. With the only change to the parametres being the hike in the FBT rate, my current vehicle lease will return a zero benefit over "normal" finance arangements (its just more convenient).

Also, Garry's comments are pertinent. To mitigate this issue somewhat, I arranged my own insurance, but if I was to return the vehicle rather than purchase it at the end of the lease, you can be sure there'd be no compensation for any mods.Life just ain't that serious.
Rohan (Sydney)
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Reply By: Member - MARK - Friday, May 23, 2003 at 23:20

Friday, May 23, 2003 at 23:20
If you are able to Salary sacrifice and are in the high tax bracket Leasing is attractive.I Salary Sacrifice the whole package including fuel and maintenance and do 40,000 klm + annually so that is the lowest FBT tax rate so I find the whole package costs me in my dollars around 53% of the cost of the vehicle and running costs.At the end I have a residual and hopefully the vehicle should be worth a lot more than the payout figure
AnswerID: 20897

Follow Up By: Malcolm - Saturday, May 24, 2003 at 22:57

Saturday, May 24, 2003 at 22:57
and if the vehicle is worth a whole lot more than the payout figure there is no requirement for the lease company to let you have it for that price.
It is not at all uncommon for the lease company to quote you a buy out figure or decide to take the vehicle back.
Remember in a lease they cannot under any circumstances agree to sell you the leased item at the end of the lease, or transfer ownership for the 'payout' figure.
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Follow Up By: Savvas - Monday, May 26, 2003 at 10:26

Monday, May 26, 2003 at 10:26
Malcolm, that's true in an operating lease only.

In a novated finance lease, the onus is on the customer to ensure the residual is paid out. You can keep the vehicle, trade it in, re-lease it, whatever, but the residual needs to be paid out. If you can trade it in and get better money than the residual, you win.

In an operating lease, novated or otherwise, there is no obligation on the lease company to give you anything at the end of the lease. All that happens is that the vehicle is returned in good condition at lease end and walk away.

It's a case of know what type of lease it is, and know the fine print.
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Reply By: Andrew - Friday, May 23, 2003 at 23:28

Friday, May 23, 2003 at 23:28
The benefit comes from being able to take all the repayments of the vehicle and running costs, from your salary before tax. Therfore if you get $500 a week for arguments sake and the terms of the novated lease mean you you have to pay $150 a week toward the repayments and running costs, you only get taxed on the $350 remaining. therfore you get a tax saving by paying less tax so the tax man is actually paying some of the vehicle off.

The down side is you will be locked into a contract for 3,4 or 5yrs. You also have to nominate how many Km's you will travel per year. Anything less than about 20,000km's and it's not worth it. If you earn less than around $50,000 and have a mortgage, it can make things very tight too. You can nominate 20, 25, 30,000km's or more if you think you will travel that many each year but, once nominated you must travel at least that many Km's or FBT will kill you. even 1km under your nominated k's will cost you a lot of money.

The reason people nominate higher Km's is the more you do, the more cost effective it is.

It all comes back to your committments $$$ wise. Don't take my word for it alone by any means but it was too much for me. Check it out with a qualified person.

Adding a portion to my mortgage gave me the flexability to pay it off slowly when i need some cash or in lumps when I have spare quids. Not the most long term cost effective way, but easier to sleep at night.

Hope this helps Jazz.
AnswerID: 20899

Reply By: Hugh - Friday, May 23, 2003 at 23:45

Friday, May 23, 2003 at 23:45
There are a number of web sites that discuss the novated lease benefits. Further to the above comments, from 01Jul02 there is a 100% rebate for GST via input tax credit. What does this mean?
1) When you buy your vehicle, the lease company claims the GST input tax credit and passes that benefit to you i.e. your loan is purchase price less 10%. This is on top of whatever deal you can get (fleet discount, etc) so works out to quite a saving.
2) Lease payments are paid by your employer (novated) and they claim an input tax credit for GST on the lease and the benefit should flow to you, so what comes out of your pre-tax dollars is less 10%.
3) Depending on how you structure running, maintenance costs, etc (mine is all managed by employer) there is another input tax credit which should flow your way, so these costs are also less 10% and pre-tax.
4) The only catch is that the residual payout will attract GST, so add 10% to your residual.

Works out to be a good deal, if you are considering borrowing to buy a car. In fact, my sums showed cash outlay over lease period (including residual) to be better paying cash for a car (and I preserved my cash). The catch is FBT and here the benefit is greater kms, as the statutory fraction decreases as kms increase.

I think this worked well for me, however I would recommend you seek independent advice if unsure of the details.

Hugh
AnswerID: 20900

Reply By: Member - Votlip - Saturday, May 24, 2003 at 08:32

Saturday, May 24, 2003 at 08:32
I am in the process of purchasing a new Nissan Patrol under a Novated Lease and will hopefully collect it in the next week or so. I had to find out my own information about how this works and my findings were the same as the above. With the fleet discount of around 10% and GST taken out, it was a savings of around 20%. I worked out that at the end of the lease and paying off the residual (Incl the gst on it), the total repaid worked out to be slightly more than if I had walked in off the street and had to purchase it without the fleet/gst discounts. It is the only way I would be able to afford the car. Apparently you can't trade your old vehicle in and reduce the amount of the lease, I don't know why though. You can also purchase a second hand vehicle but it needs to be no more than 7 years old by the end of the lease term. If purchasing from a car yard or auction in some States (At least not in S.A.), the gst is reduced/reimbursed? from the purchase price.

If you already own a vehicle, you can sell it back(?) and Salary Sacrifice, but I don't know how this method works.

From speaking with others that currently Salary Sacrifice, the monthly running cost amounts deducted from their pay is more than is required to run the vehicle. The idea is that during the lease period, you should never have to pay any costs out of your pocket. Everything is put on a card and the excess at the end of the lease is paid back to you (after tax!).

The biggest considerations I found is that you must do sufficient km's to reduce the FBT (under 20K not worth it, needs to be at least 25k or 40k - and as stated above, not 1 km less than you nominate or the fbt can nearly double.) You must also be in a higher tax bracket to get the best tax benefit. You also need to chose the vehicle you want to purchase VERY CAREFULLY. If you select a vehicle that doesn't retain its resale value, the residual you have to pay at the end of the lease may be more than what the car is then worth.

This info is what I have been able to find out so far. As others have stated, see your accountant and get him to give you an expert opinion. I went to see a financial adviser who informed me over the phone that they knew everything about Salary Sacrificing. Pigs bum, they told me the very basics and I left there knowing no more than when I walked in there! Anyway, hope this helps!
AnswerID: 20916

Reply By: Albyw - Saturday, May 24, 2003 at 10:48

Saturday, May 24, 2003 at 10:48
I have looked into getting a new Prado with a novated lease arrangement. It is the only way I could consider ever having such a vehicle. I agree with all comments above. Do your homework. Remember that it is not your vehicle. You will need to really look after the vehicle otherwise the resale value at the end of the lease period will be affected. This is an issue with leasing a four wheel drive. Using a 4x4 as it is intended does lead to wear and tear - marks on the paint job, a few dings here and there, fine dust in the nooks and crannies and stress on mechanical components.
A Prado will cost 50K+ (GXL). Using it on the tar only will give me a lovely vehicle to sell at the end of the lease(apart from having relatively high km's). Then it becomes a sliding scale of off road use from flat dirt to rock hopping. You need to decide what off roading you intend to do and how this will affect your investment. I have not ruled out going this way but am not rushing into it. Also 25000km is alot to do each year for many people. Our old cruiser is a bit tedious on long tar trips but I don't need to worry about throwing it around in the bush.

Good luck
AnswerID: 20929

Reply By: colin - Saturday, May 24, 2003 at 21:18

Saturday, May 24, 2003 at 21:18
some leases you can claim back the GST in full on your bass statement, just bought a $110,000 truck and was able to claim all GST straight away and put all on to lease which put me heaps ahead on lease payments, good to have that buffer , some leases can only be claimed as payments are made, also have also put the ballon into the monthly payment so there is no pay out after the lease period. Col
AnswerID: 20958

Follow Up By: Malcolm - Saturday, May 24, 2003 at 23:01

Saturday, May 24, 2003 at 23:01
"so there is no pay out after the lease period" sorry, not allowable as the tax department sees that as a higher purchase agreement. The residual at the end of a lease (being no requirement on the lease company to sell it to you at that price and GST will be payable) to be recognised as a true lease needs to be 22.5%
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Follow Up By: colin - Tuesday, May 27, 2003 at 12:06

Tuesday, May 27, 2003 at 12:06
Hi Malcom, tiss allowable am doing it at the moment all legal just been audited and passed with flying colours, i do have a lease but incorperated the pay out figure which is worked out at signing into the monthly payments, which means higher payments but the residual and tax has been paid on a monthly payment. Hve done this system on two trucks and my 4x4 which are all on leases and have had no probs with the tax man. Also was able to claim the GST back in full on the next BASS statement, and thats why the audit as when the tax man has to pay out he will check that BASS statement. Col
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Reply By: Pertrona - Sunday, May 25, 2003 at 07:05

Sunday, May 25, 2003 at 07:05
You guys are living in fairlyland if you think the ATO is going to allow these leases and the GST component

The terms and payouts you are quoting are illegal and not considered a lease

If I was an employer there is no way I would consider a novated lease
At the end of the lease the employer can ask for the vehicle back as it is after all the employers property
AnswerID: 20978

Follow Up By: mick - Sunday, May 25, 2003 at 18:53

Sunday, May 25, 2003 at 18:53
Pertrona,

Can you tell me where you are getting your info from??

I have just entered into one!
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Follow Up By: David N. - Monday, May 26, 2003 at 06:49

Monday, May 26, 2003 at 06:49
Mick, I agree! Although I haven't personally, I know many people who have done the same...
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Follow Up By: Savvas - Monday, May 26, 2003 at 10:37

Monday, May 26, 2003 at 10:37
Pertrona....

Totally incorrect. It depends on the GST status of the employer. My employer can claim input credits on vehicle purchase and running. Some employers can't.

Also, the whole concept of NOVATED lease is that the lease contract is between the employee and the lease company. However, payment of the lease is then novated to the employer. The tax advantage comes from the vehicle also being used for work purposes.

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Follow Up By: Allyn (Pilbara) - Monday, May 26, 2003 at 10:53

Monday, May 26, 2003 at 10:53
Pertrona
I have just recently paid out the residual on my lease vehicle (Novated Lease) and now it is mine solely and wholly. After 2 +1 years of leasing arrangements I can tell you that it is possible & permissible provided your employer has the correct GST status.

I believe that your information is incorrectIn here - thinking of out there !!!
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Follow Up By: mick - Monday, May 26, 2003 at 12:27

Monday, May 26, 2003 at 12:27
Allyn (pilbara)

Where you able to make any modifications to your vehicle, if so what.

Thanks Mick
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Follow Up By: Allyn (Pilbara) - Tuesday, May 27, 2003 at 00:27

Tuesday, May 27, 2003 at 00:27
Mick
Upgraded suspension and tyres. Made a few mods at my own expense but always knew I would be buying it at the end. Bit of a risk I suppose but most of it could be taken off again. Mine was 3 years old before I entered lease (not allowed to be older than 7 years at end of lease)
There's a secret to getting after market as opposed to Original replacements also.
It was a worthwhile exercise but to be honest I'm glad to be out of the arrangement finally. All those expensive oil changes and services.
Changed my oil & filter today for $65 - woo hoo !!!In here - thinking of out there !!!
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Reply By: Steve - Sunday, May 25, 2003 at 23:40

Sunday, May 25, 2003 at 23:40
And can anyone tell me what this has to do with Exploring Australia ? ie EXPLOROZ.COM !!!

Any wonder that there is little take up of 'membership' ....
AnswerID: 21034

Follow Up By: David N. - Monday, May 26, 2003 at 06:46

Monday, May 26, 2003 at 06:46
???? strange comment!
Actually, quite a lot I would think, as most people who read this forum either own, or would like to own a 4WD.
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Follow Up By: Member - Votlip - Monday, May 26, 2003 at 20:58

Monday, May 26, 2003 at 20:58
Dave,
I agree with you, any information that can assist someone in how to obtain the means (i.e. Motor vehicle under a Novated lease) to "ExploreOZ" is certainly worthwhile!!

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Follow Up By: twandy - Monday, May 26, 2003 at 23:33

Monday, May 26, 2003 at 23:33
Thanks for all the info on the lease situation. I am also in the middle of looking into this and this forum has provided me with a lot of info I was unaware of.
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Follow Up By: Allyn (Pilbara) - Tuesday, May 27, 2003 at 10:25

Tuesday, May 27, 2003 at 10:25
90% of the people I know who are leasing have 4WD'sIn here - thinking of out there !!!
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Reply By: Savvas - Monday, May 26, 2003 at 10:33

Monday, May 26, 2003 at 10:33
Jazz...

A novated lease is worthwhile if your annual kms are high enough. The thing that kills it is fringe benefits tax.

If you are doing less than 15000kms per year, just walk away as FBT is 27% annually of the vehicle value. You are better off owning.

At 15000kms to 25000kms per year, the FBT is 20% of the vehicle value. So you need to do your sums on whether it is worth if for you. If you are on the highest marginal tax rate, and you can package the vehicle with the tax rate coming down a bracket, then you will have a slight advantage over owning it.

At over 25000kms to 40000kms a year, the FBT is 11% and over 40000kms is 7%. If you are in either of these brackets, then there is a good tax advantage for you to lease.

I think you should consult a tax adviser anyway, to assess your own situation.
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Follow Up By: Savvas - Monday, May 26, 2003 at 10:39

Monday, May 26, 2003 at 10:39
Sorry...in the 3rd paragrah it should read - "If you are on the highest marginal tax rate, and you can package the vehicle WITHOUT the tax rate coming down a bracket, then you will have a slight advantage over owning it."

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Follow Up By: Steve - Monday, May 26, 2003 at 21:50

Monday, May 26, 2003 at 21:50
Thanks fellows ! ... i have an accountant who does my returns and does all my financials... but he knows nothing about the Outback ! ... but ask him about Greece ... !
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Reply By: Jazz - Wednesday, May 28, 2003 at 20:32

Wednesday, May 28, 2003 at 20:32
Thanks all the feedback...just to answer one question though...apparently, the amount paid towards the lease, in my case about $250 post tax, 100% offsets the cost of FBT, effectively reducing it to nothing. So what I am told, and from the paperwork I got, the lease costs will be paid direct from my tax savings with my after tax contribution, which goes to the running costs of the car (which are paid on a fleet card and I'm told represent huge savings - paying around .50c/litre for fuel), cancels out any FBT costs....still sounds too good to be true...
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Follow Up By: colin - Thursday, May 29, 2003 at 02:56

Thursday, May 29, 2003 at 02:56
make sure you run a log book for 3 months as these figures only relate to business runing of the vehicle , every vehicle needs a log book for 3 mths. Col
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Follow Up By: Member - Votlip - Saturday, May 31, 2003 at 00:56

Saturday, May 31, 2003 at 00:56
Jazz, As a result of a novated lease, I have just collected my new 3lt TD Nissan patrol yesterday. It now has 113 km on the clock and I'm having trouble getting this silly grin off of my face :-) I was told the same thing, that by paying an amount after tax, that is equivalent to the running cost, you do reduce your FBT to nil. It's called the employee contribution method. Good luck!
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