It is well known that EVs are much cheaper to run than petrol cars. Drive suggests that an EV will save you between $1,300 and $3,000 per year. The reasons behind this are clear – EVs are more efficient than petrol cars and the fuel cost is considerably less (even free, when powered by solar).
But many are keen (and right) to quickly point out this does not take into account the upfront cost of the vehicle. So what if an EV saves us $1,000 per year if it costs $30,000 more to buy?
But, do you know you might be able to buy your EV for half price?
Through novated leasing, the upfront cost of EVs can be drastically reduced, bringing them into parity or even making them cheaper than petrol equivalents.
Below I highlight the key points – I think more people need to know about novated leases. Even if this article isn’t for you directly, I encourage you to read on and let others know: for anyone buying a new car, an electric vehicle with lower running costs and potentially half-priced through novated leasing, becomes a no-brainer.
Novated Leasing
Novated leasing is using your pre-tax income to purchase, or lease an asset.
You do not need to use the vehicle for work – it can and often is for personal use.
Instead of buying a car and paying cash, you enter into an agreement to lease the car over a period of time (commonly four years). The lease and running costs of the car are paid in pre-tax dollars. When you buy a car outright, you use post-tax dollars. This is huge difference. Let me explain with some examples.
Let’s say Gary is looking at a new Tesla Model Y valued at $60,000. Gary’s income is $250,000. In the Base line example, Gary pays $78,638 in tax on his income, but in the Novated Lease example, Gary’s payments for his Tesla effectively act as a tax deduction ($60,000 divided by four years = $15,000 per year). This reduces his Taxable Income and saves him $6,750 in tax each year for four years. The cost of the Tesla effectively becomes $33,000. That’s a huge difference!
Not everyone has the luxury of a $250,000 income, so let’s say Gary’s income is $100,000. In this instance, Gary is saving $4,500 in tax, or $18,000 over four years, effectively reducing the cost of the Tesla to $42,000.
Two points are clear from this. First, the more you earn, the more tax you save through novated leasing. Second, for the vast majority of people, the savings are meaningful, significantly dropping the effective cost of the Tesla.
At the end of the novated lease, you typically have a few options like paying a residual amount to own the car, refinancing, extending the lease or upgrading to a new car.
Why EVs?
I’m reluctant to paralyse my dear readers with too much information, but I should quickly point out that novated leases work especially well with EVs due to the Australian Government’s Electric Car discount. The discount includes a Fringe Benefits Tax (FBT) exemption on EV novated leasing payments. So you can novate lease a petrol car, but the short story is the tax savings are not as significant.
Eligible EVs are any Battery Electric Vehicle (BEV) or Plug-in Hybrid Electric Vehicle (PHEV) priced under the applicable luxury car tax threshold, presently $91,387.
Why Not?
There are fees and interest charges associated with the novated leasing agreement, and there are some reasons to avoid novated leasing, including:
- employment – novated leasing is tied to your employment, so it can be risky if you plan to retire, leave the country or potentially change jobs
- you like to change cars – you might lose the flexibility of changing cars given the long-term novated lease contract
- other financial/tax concerns – best to chat to your tax accountant to check the specifics on how your tax might be affected
Summary
I think the conclusion is clear: if you’re looking at buying a new car and you have a salary, you need to at least consider an EV and a novated lease. In many cases it will be cheaper upfront, cheaper to run, cheaper to service and hopefully you’ll also be able to use it to power your house ⚡️
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