Thinking of taking out a novated lease to buy a new EV so you can leverage the fringe benefits tax exemption? Read this first

A novated lease on a new EV can be a great way to save money.

But there are pitfalls – and in an industry that is booming due to government incentives it could also end up costing you more.

I’ve just been through the headache of arranging a novated lease on a new electric car.

It showed me that even with a generous fringe benefits tax exemption on zero emissions vehicles you could still end up paying more than if you financed the car elsewhere or paid for it outright.

READ MORE: Why the FBT exemption for EVs isn’t under threat … yet
READ MORE: Plug pulled! As PHEV utes launch in Australia, a key tax break is being removed
READ MORE: Vic government sued in High Court over EV tax

Here’s everything you need to know about taking out a novated least for an EV.

The lure: Tax benefits

First, some background.

The reason so many people are taking out novated leases on new cars is because it’s a salary sacrifice arrangement that allows people to pay for the car from their pre-tax income.

If you use the car for personal use, that usually means you will pay fringe benefits tax. The idea is that because there is a benefit to the employee there should be tax paid on it.

Leasing companies typically structure a lease so the employee doesn’t pay FBT by making post-tax contributions.

It means they still get some sort of tax benefit.

But with EVs, the current government incentive means employees can take out a novated lease and fund it wholly from pre-tax income, in turn reducing their tax payments. The payments not only apply to the car itself but also registration, insurance, charging, servicing and other eligible costs.

The potential benefits can run into tens of thousands of dollars over the term of the lease, with those on the top tax bracket set to benefit most.

Ask about the interest rate

Clearly, there’s a big temptation to sign on the dotted line for a novated lease because the tax benefits are so big.

But the first question you need to ask is what the interest rate is.

Unlike a bank loan – where that figure will be front and centre – with a novated lease it may not even be mentioned on the leasing documents. And good luck finding it on the leasing company’s website.

Instead you’ll just be provided with a repayment amount.

Novated leases typically attract higher interest rates than a regular car loan and, as we learnt, it can be ludicrously high.

Ours was about 11.5 per cent, well above the circa-7 per cent you can achieve for a car loan.

Suddenly the tax benefit doesn’t look so appealing…

Simply by asking the question we knocked more than two percentage points off the rate, saving more than $1000 per year.

Part of the issue comes down to the way leasing providers operate.

Many are not financiers, so they outsource that component.

That’s another entity getting involved and no doubt wanting their cut on the way through.

That said, some leasing operators do finance their own loans so they may be able to offer a sharper rate.

Interest rates are usually fixed

Unlike home loans – and some others – a novated lease typically has an interest rate fixed for the term of the lease.

Even if the RBA rate reduces significantly during the term of your lease – which can be up to five years – you’ll be stuck paying the higher rate.

In a period when interest rates fall – something most economists are predicting for the coming couple of years – it means you could end up paying more than you would if you simply added the finance to your home loan.

Again, it’s another thing to consider.

Little choice on your leasing provider

Unlike a loan from a bank, with a lease you don’t usually get to choose who provides the lease.

Many employers do a deal with a single leasing company to provide vehicle leases under an arrangement. Bigger companies may choose two or three.

Why not allow employees to shop the entire market?

Because the way a lease is structured it need to run through your payroll department.

It seems employers aren’t keen on opening the doors – and filling out all the paperwork for every single leasing company.

That makes sense.

But it means if you see a sharper deal beyond the company (or companies) who has the deal with your employer, there’s generally no option to sign up.

With those companies that only deal with a single leasing company it obviously reduces the ability to negotiate.

Beware of insurance

Leasing providers package in the insurance to simplify proceedings.

But often it comes with a big premium.

In our case, the insurance was going to cost thousands per year.

A quick check online with a major provider lowered that to less than one third of the original quote.

It seems like a no brainer to sign up.

However, because of the way the government structures a novated lease your insurance needs to be paid after the lease has been signed and finalised.

But the finance is typically only released once the insurance is in place.

Yep, the two don’t add up.

For those wanting to source their insurance themselves – and who wouldn’t if you can save thousands a year? – it means arranging a cover note before you take delivery of the car and paying for the insurance once it’s parked in your driveway.

It can be done, but it’s not as smooth a process – which is why leasing companies try to get you to sign up to their insurance.

There’s more to a lease than the tax breaks

Throw it all into the mix and there’s a whole lot more to a novated lease than simply banking a saving on your tax.

In many instances it could end up costing you more than it would have had you simply borrowed money on your mortgage or funded the car yourself with cash.

I’m not saying you shouldn’t investigate a novated lease.

There are potentially decent benefits.

But also consider your options, some of which could end up being more appealing financially than leveraging that government tax break on EVs.