Car leasing guide: A smart way to get into a new car

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We explain what car leasing is and how it works in detail.

If you’re buying a new car there are a few options available, from the well-known car finance option to novated leasing. The big difference between these two popular choices is that if you finance a car you are buying the car yourself, whereas leasing means that after an agreed period of time, the car is returned to the leasing company (which is in effect financing the purchase of the car from the manufacturer and the asset belongs to it).

While not owning the car might seem like a bad idea, a major motivator for car leasing is the tax benefits it can bring (which itself brings thousands in savings). Additional costs such as insurance and maintenance are included in the single pre-tax monthly payment too, so it can add up to a lot.

Here’s a quick overview of the pros and cons:

Advantages of leasing

  • One of the most affordable ways to get long-term access to a new car
  • Deposits are normally cheap
  • You can have a better car for a lower equivalent cost
  • It’s low hassle
  • Fleet price discounts
  • Other costs normally associated with owning a car can be included

Disadvantages of leasing

  • You don’t own the car
  • Employees need employers to agree for a novated lease
  • Contracts don’t always include all on-going costs

How it works in Australia

Both employees and the self-employed can go into a car leasing arrangement if approved. Once you are approved to do so, you can find a brand-new car that suits your budget (monthly payment) for the lease. This can include ongoing costs such as finance repayments and running costs like registration, fuel, servicing, and insurance. So everything is bundled into one payment.

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But do check this before signing the dotted line, and also talk to a professional financial advisor for the specifics on what the tax savings for your situation will be.

What are the tax benefits when leasing a car

So saving money on your tax bill sounds great? Here’s how a novated lease can help do that.

Novated leasing is a financial mechanism approved by the Australian Tax Office. Put simply, the monthly payment to the provider is paid from the lessee’s pre-tax pay. This means that once the amount is deducted, the amount left is what is taxed. So the cost of leasing a car over a financial year will help reduce the total taxable income for that financial year. The same applies if you are self-employed.

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There are leasing calculators available online that can help to precisely show the amount you can save when leasing over buying a vehicle. An example of a calculator that provides a good breakdown of costs is this one from Autopia (owned by Smart Leasing, and not sponsored). Have a look around at other providers too, but make sure to use an Australian-based car leasing company as it will be relevant to local regulations and tax.

Car lease providers in Australia

As a starting point, some car leasing providers in Australia include:

How many years can you lease a car for?

Novated leases are usually taken out over any period of time from one to five years. The longer the lease, the older the car will get, so some drivers will want to ‘freshen’ up every few years into the latest model.

Alternatively, there will likely be the option to buy out the vehicle at the end of the agreement, and the older it is, the cheaper it will likely be to purchase outright. However, this will be an additional cost to all of the payments already made over the period of the lease.

Discounts for electric cars (EVs) when leasing

If you’re wanting an electric vehicle then novated leasing can bring benefits.

The Australian Government provides a fringe benefit tax discount for cars that are eligible as zero or low emissions and fall below the luxury car tax threshold (currently set at $84,916). The vehicle must be first held and used from 1 July 2022.

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The FBT savings are for the personal use of vehicles operated by a business or those used under a novated lease agreement.

If the car you want to lease is eligible, then FBT is not payable, however, the employer must include the vehicle as a reportable fringe benefit on the employee’s payment summary. We encourage seeking financial advice when looking to lease a car as every person’s situation can be different.

What is a low or zero-emissions vehicle?

The Government describes this as having to meet two criteria:

  1. It is a:
    • battery electric vehicle
    • hydrogen fuel cell electric vehicle, or
    • plug-in hybrid electric vehicle.

     

  2. It is a car designed to carry a load of less than 1 tonne and fewer than 9 passengers (including the driver).

Motorcycles and scooters are not cars for FBT purposes and do not qualify for the exemption, even if they are electric.

Battery electric vehicles include the Hyundai Kona Electric, MG ZS EV, BYD Atto 3, Mercedes-Benz EQA, BMW iX1, Hyundai Ioniq 5, and more. For further inspiration, you can check out our list of electric car reviews.

Plug-in hybrid electric vehicles include the Mitsubishi Outlander PHEV and Eclipse Cross PHEV, MG HS, Kia Sorento, Volvo XC90, and Ford Escape.

Hydrogen fuel-cell vehicles are in their infancy and it is unlikely anyone would seriously consider purchasing for personal use given there is almost no hydrogen fueling stations in Australia.

What cars can you lease?

It is probably better to ask what cars can’t you lease. The answer is just about any vehicle new or old – to a certain age – and from sports cars to utes, can be leased. This includes leasing a vehicle you already own.

Looking at new cars, just about any motor vehicle is eligible, although your potential leasing company will let you know if it’s not. Used cars are a little trickier as they can’t be too old – somewhere around 7-10 years depending on the novated leasing company. But if you like the idea of leasing a classic car this is also possible, as long as it holds value.

We keep a list of the latest car leasing deals here.

Is car leasing a good idea?

It really does depend on the person and situation.

For those who want a fresh new car and are in a financial position to reap good tax-saving benefits, leasing looks attractive. Add in ongoing running costs to the one single payment, and it might just be one of the simpler ways of having a new car.

But there are good reasons to buy to own: you are obtaining an asset over the life of the payments (although not entirely true with balloon-type finance), and you can still trade in to a newer model – albeit with a potential financial hit depending on how the car was purchased.

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