Should I get a new lease for this EOFY?

Renewal leasing can be a good way to get a new car at the end of the financial year, but here are some things to keep in mind.

In the tough and tumultuous economic struggles we're going through right now, has there ever been a better time to get someone else to pay for your new car for you?

To be fair, there is never a bad time for a deal like this, but as the end of the 2019-2020 financial year approaches, it would be wise to plan for the very uncertain 12 months ahead by asking your employer to help you with the cost of owning a vehicle.

And the best way to do that once you get the hang of the process is with a new lease.

Don't be intimidated by the word "rent", for starters. While you'd always prefer to pay for your own home rather than renting someone else's and thus chipping in on its mortgage, things aren't exactly the same when it comes to cars, which for most of us are second-best. the most expensive item we will ever buy.

In terms of novation, Investopedia helpfully defines it as "the act of replacing a current existing contract with a new contract where all parties involved mutually agree to make the transition." If this language gives you a headache, you are not alone and you are probably not an accountant or a lawyer, so let's make it a lot easier.

What is an upgrade lease and why do you need it?

At the end of the leasing period, you have the opportunity to exchange the car for a brand new one and hand over the used one.

The easiest way to present an updated lease where your employer receives financial support to help you "buy" a car (you won't actually "own" it per se, you'll just use it, but we'll get back to this) is to remember when your parents helped you buy your first car and you used your mom and dad's bank. Only this time, your employer will be stricter about payments.

So, in essence, a renewed lease means your employer joins you in your new car purchase agreement and allows you to pay for your car as part of your pay package, which of course also allows them to save some money. .

One of the wonderful and yet slightly more difficult parts of the revamped leasing deal is that you get paid for the car from your pre-tax income (your gross income, if you will).

This means that your income tax is then calculated on your reduced salary, which leaves you with a little more disposable income. And this is what we will all strive for more than ever as we try to get through the current recession/depression/global woe.

Remember that if you were to take out a loan and buy a car for yourself, or even negotiate the lease yourself, you would be paying out of your after-tax dollars, which is a much less exciting option.

Another easy to understand tax benefit of using the upgraded lease option is that it means you won't have to pay GST on the purchase price of your car (it's sales tax after all and you're leasing it out). ). rather than buying it), which saves you 10% over the list price (so if a new car cost $100,000, you would normally have to pay $110,000, but you save those $10 with a rental novation), which is convenient amount.

To put it as simply as possible, here's how an accountant would do the same using financial language: “The renewal lease involves you, your fleet supplier, and your employer. This allows an employer or business to rent a vehicle on behalf of an employee, with the employee, not the business, responsible for the payments.

“The difference between refreshed leases and conventional financing is that your vehicle payments include all running costs and are taken from your pre-tax paycheck, so no matter what tax scale you pay, there will always be a benefit.”

Yes, the item on running costs is also worth noting.

So how does all this work in practice?

The renewal lease involves you, your fleet supplier, and your employer.

Well, part of the innovation is essentially that you get your employer to join you in this new contract where they help you pay for the vehicles within your agreed salary.

Any EOFY is a good time to talk about renegotiating your pay package, and this year, with many businesses desperate for more cash, it will probably be a better environment than ever to ask for something like an updated lease agreement. .

You can then go to the car shop and ask the dealer about leasing offers.

Typically, you will rent a new car for at least two years (long enough to really enjoy the car and then want to buy a new one), but sometimes three or five years.

At the end of this lease period, you have the choice of trading in for a brand new car and returning the used one, which many people do as long as their employers are still okay with the idea of ​​leasing, or you can pay a pre-set fee known as a lump sum and save for with the car you rented.

Imagine that you are blowing money into a balloon, and your monthly rent payments add to it. Once the balloon is full, you will own the car, but what you put in over the lease term will never be enough to reach the purchase price.

So unless you want to just stay in the leasing program and get a new car every few years, you need to fill a balloon with your own money to own the whole car. Hence the "balloon payment".

How much do you actually save by using a refurbished rental?

Innovative leasing can save you some serious money.

Luckily, there are handy updated car rental calculators like this one at streetfleet.com.au that will do the math for you because there are a few variables to add; like the price of your car, your income and how long you want to rent for.

While the benefits may be fairly obvious, the actual amount you intend to save will depend very much on your personal circumstances.

Keep in mind that if you lose your job or change jobs, you will go to your next employer, cap in hand, and ask them to extend the new lease you already had.

Otherwise, you will be forced to terminate the lease and pay the remaining debt. You can also get stuck with the departure fee. As always, it is worth reading the documents, and reading them carefully.

And compare the interest rates you'll pay on an upgraded lease versus a regular car loan, because they're likely to be higher. You have to weigh that against pre-tax savings and benefits. A regular car loan does not allow you to buy a new car every few years.

In short, there has never been a better time than the upcoming EOFY to take stock and consider what is best for you when it comes to purchasing a new machine.