By now, you may have heard about novated leases. And although most individuals consider them in the context of brand new vehicles, they may also be applied to second-hand cars. Of course, you should observe a few specific conditions and restrictions.
Novated Leases
If you’re in need of a recap, a novated lease is a popular salary packaging arrangement where an employer, an employee, and a leasing company agree to a three-way agreement.
Under this arrangement, the employer deducts the car lease payments from the employee’s pre-tax salary, which affords employees a tax break.
What to Consider
If you are looking at taking out a novated lease for a used car, you will want to think about a number of issues.
For starters, many leasing companies restrict the age and condition of the second-hand vehicle that might be eligible for a novated lease.
More often than not, there will be a life span for the vehicle in question. That is, they may only extend said finance to vehicles that are up to 7 or 10 years old by the end of the lease term, and those that comply with certain safety requirements
When it comes to the terms of the lease, this will be shaped by the value of the car. Under a novated lease, the leasing provider has the right to assess the vehicle’s value, often through market research or a professional valuation, to determine the lease repayments.
A key difference between financing a new car versus a second-hand car is the potential for higher interest rates or less favourable terms, as second-hand vehicles generally have higher depreciation rates and may represent more risk to a lender.
On the other side of the equation, not every employer will be receptive to a second-hand vehicle as part of a novated lease deal.
The Deal
The general structure of a novated lease for a used car is similar to that of a new vehicle. Payments are made through salary sacrifice, reducing the employee’s taxable income. The lease term typically ranges from one to five years, and at the end of the term, the employee may have options, such as paying a residual value to own the car outright, trading it in for a new lease, or refinancing.
With that, all the same tax advantages apply as well. Because lease payments are made from pre-tax income, an employee can reduce their taxable income, resulting in potential tax savings. These benefits apply to both new and used cars, although Fringe Benefits Tax (FBT) is still payable on the vehicle, and this tax will be calculated based on the car’s value and use.
Overall, a novated lease works more or less the same for a second-hand car as it would a brand new vehicle, albeit the process may be subject to more scrutiny. Whichever option you choose to pursue, be it new or used, novated leases are a great option for many employees who stand to benefit from the potential tax savings.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.