At times, novated leasing and salary packaging can seem quite complicated and confusing. By understanding the terms often associated with both options, you’ll be able to make a more informed and educated decision.
Here are some of the most common terms and phrases you will come across when looking to organise a novated lease or salary package:
Novated lease
A novated lease is a salary packaging option offered by fleet management providers like easifleet. It’s a three-way agreement between an employee, their employer and the finance provider. It’s a fantastic way for employers to provide employee benefits to their employees at minimal to no cost to the business.
You sacrifice a portion of your earnings and in return, you can choose a car, any make or model, new or old that suits your lifestyle. All costs associated with the vehicle such as fuel, tyres, servicing, insurance etc. are included in the set repayment amount. It’s a great way to organise your finances as you know there won’t be any unexpected expenses throughout the loan term.
Salary packaging
Salary packaging is an agreement between an employee and their employer. It involves the employee receiving a vehicle, a new laptop, or even making extra superannuation repayments as part of their employee remuneration package.
Instead of the employee only receiving a gross income, they instead take some of their pay in a different form of benefit (such as a vehicle) before income tax is applied. It’s a great way to reduce your taxable income as an employee, meaning you pay less overall tax, and receive a car/laptop etc. of your choosing in return. For more information on how salary packaging works, visit easisalary.com.au who have an online calculator to help you work out your savings.
Taxable income
Taxable income is any income you earn that is subject to taxation from the government. It includes salaries, wages, bonuses, investment income and any unearned income you’ve received. Taxable income is also known as gross income minus any deductions or exemptions in that year.
Balloon payment
Once you reach the end of a loan, you may be required to pay a balloon payment. A balloon payment is the amount of the loan capital that has not been repaid yet. They typically vary based on the term of the lease, coming less the longer the lease runs.
Car finance
When you don’t currently have the money available to purchase a vehicle outright (or you don’t want to risk depleting your savings) you may consider taking out car finance.
Car finance involves receiving funding from a bank, financial institute or even a family member to purchase the car. You then make scheduled repayments to pay off the vehicle over a set term. Although financing is a popular way to purchase a vehicle, it’s important to pay attention the interest rate, as they can vary based on the type of finance.
Car lease
Also known as a finance lease, a car lease allows you the full benefits of owning a car, while the financier retains actual ownership of the vehicle, until the loan is paid off. Car leases are ideal for companies, contractors and individuals who use their vehicle to generate income (such as a plumber or electrician).
The way it works is the financier purchases the vehicle on the customer's behalf. The customer then leases the vehicle from the financer and pays a fixed amount per month for the term of the lease. Once the lease has reached the end of the set term, the customer can either decide to:
Pay a residual value (balloon payment) to take ownership of the vehicle
Trade in the vehicle
Re-finance the residual and continue with a lease
Chattel mortgage
Finance companies can lend money to a customer for the purchase of a motor vehicle under what is known as a chattel mortgage. The customer then makes regular repayments to the finance company to pay back the vehicle over a fixed term. Once they reach the end of the term, the customer can make a balloon payment to pay off the car, trade in the vehicle, or refinance.
Chattel mortgages are great for businesses and individuals who are predominantly using their vehicle for income producing purposes. One of the key benefits of a chattel mortgage is that the mortgage is secured against the vehicle, which usually results in lower interest rates.
Commercial hire purchase
A Commercial Hire Purchase (CHP) agreement involves the financier purchasing a vehicle on behalf of the customer. The customer has full use of the vehicle, however, is not the owner. The customer then makes fixed monthly repayments to the financier over a fixed term.
Once the completed term is over and all costs have been paid in full (price of the vehicle plus any interest), the customer takes ownership of the vehicle. There is usually no balloon payment with this form of finance as the cost is usually included within the term repayments.
Depreciation
Depreciation represents the loss in value of a product. The term is usually used for businesses to decrease the value of an asset over its expected useful life. Depreciation is commonly linked to assets such as machinery, buildings, land and inventory. In terms of vehicles, depreciation is used to represent the loss in market value of a car.
Luxury car tax
If you decide to purchase or import a luxury car, you may be required under Australian law to pay a luxury car tax (LCT). The LCT is only payable depending on specific parameters which can be found here.
Net present value
As time goes on, a $1 today is worth less than $1 10 years ago and you could buy more with a $1 10 years ago. Because of this, net present value is used to estimate the expected future worth of an investment to help you understand if the investment is a wise one.
Residual value
Residual value is used to estimate the worth of a vehicle at the end of the lease term. Vehicles usually decrease in value as the years go on so as a rule, you could assume the longer lease term you take out, the lower the residual value of the vehicle. By understanding the residual value of a vehicle at the end of its lease term, lessee’s can determine how much will be paid in repayments to cover all costs.
Stamp duty
When purchasing a vehicle, you must pay a tax levied by state governments. This is known as stamp duty. It is essentially a transfer of ownership fee, so whether you purchase a new or old car from a dealer or individual, you are still required to pay the tax. The cost associated with stamp duty varies across all Australian states and territories and is usually calculated based on the purchase price of the vehicle.
Term
A term is the fixed amount of time that repayments will be paid on your loan or lease. Most vehicle loans run from around 3 to 5 years, however, this will often change depending on your own personal situation. Understanding the length of the term and the cost of repayments will give you a better understanding of the total cost of taking out a loan.
To find out more about novated leasing and salary packaging, contact easifleet now on 1300 266 828.
