The cost of purchasing an electric vehicle can often be a hindrance for individuals seeking to make their first purchase.

However, more and more Australians are questioning whether owning an electric vehicle is necessary before driving one.

In 2022, the removal of fringe benefits tax for novated leases on electric and hybrid vehicles is definitely influencing the demand for EVs, as stated by Behyad Jafari, the head of the Electric Vehicle Council.

In the past 16 months, there has been a significant increase in the number of individuals choosing to lease electric vehicles (EVs), according to Paul Scully, the marketing director at SG Fleet.

Scully mentioned that there has been a significant increase in interest compared to before.

What exactly is a novated lease and how can it potentially reduce the cost of an electric vehicle by thousands of dollars?

A novated lease is a type of vehicle leasing arrangement.

A novated lease is a method for funding a vehicle.

This arrangement involves three parties: yourself, your employer, and a leasing company or financial institution. Your employer will own the vehicle during the lease, but you will be responsible for making payments and can use the vehicle for personal purposes.

A benefit of a novated lease is that it utilizes pre-tax income through salary sacrifice, resulting in a decrease in income tax. This becomes even more appealing for those with higher incomes. Additionally, the expenses for the vehicle such as tires, maintenance, registration, and insurance can be included in the lease.

When the lease comes to an end, you can either choose to make a final payment to take ownership of the item, or you may have the opportunity to start a new lease. The government calculates the amount of the final payment based on the initial purchase price and duration of the lease.

What changes have been made regarding taxes?

Typically, if a leased vehicle is used for personal purposes, it is subject to fringe benefits tax (FBT).

Previously, electric and plug-in hybrid electric vehicles (PHEVs) were not subject to the luxury car tax if their value was below $89,332, regardless of whether they were used for business or personal purposes.

Leasing a Tesla Model Y priced at approximately $71,000 can be more cost-effective per year compared to leasing a $56,000 Toyota RAV4 Cruiser Hybrid (which is not a plug-in and therefore does not qualify). This is due to the higher tax savings that offset the increased payments.

Renting versus purchasing a vehicle

According to associate professor Prafula Pearce from Edith Cowan University’s school of business and law, purchasing an EV outright remains the most financially efficient choice if you are able to afford it.

According to her, the most economical method of owning a car is to purchase it with cash.

However, leasing may be a more favorable option compared to obtaining a car loan. This is influenced by various factors such as the conditions and APR, as well as your current income tax payment.

Using calculations from Guardian Australia, it appears that an individual with a salary of $100,000 could potentially save over $10,000 by leasing a Tesla for four years and subsequently purchasing it, in comparison to buying the vehicle outright with a four-year car loan.

Please note that these computations are based on a single example and factors such as interest rates may vary.

According to Pearce, if you intend to keep your vehicle for an extended period of time, a car loan is likely the more cost-effective choice. However, if you prefer to regularly upgrade your vehicle, a lease may be the more convenient route.

Be cautious of any extra expenses.

It is common for leases to include an initial fee as well as continuous financial and administrative expenses. Carefully review the details to understand your financial responsibilities.

The main expense associated with a novated lease is the interest. The interest rate may not be prominently displayed in online quotes, so you will have to search for it. It typically ranges from 7% to 9%, and is usually fixed by the leasing companies. This can be beneficial during times of rising interest rates, but may work against you during periods of rate cuts. Additionally, be sure to check for any extra insurance coverage that you may not normally purchase.

What other things to keep an eye on

Although you are not required to pay FBT on a qualifying EV, it is necessary to disclose the benefit to the tax office. This may impact your qualification for other benefits, like private health insurance rebates, parental leave, childcare subsidies, and child support obligations. Additionally, the cost savings from owning an EV could also affect your HECS-HELP or student loan situation and potentially determine if you are subject to paying the Medicare levy.

According to Steven Ogle of SG Fleet, it is essential to consult an accountant or adviser for expert guidance.

Each person’s unique situation varies, according to the speaker. While there may be significant tax benefits initially, it is important to also consider any potential consequences and overall impact on your household in the present and future years.

What happens if I switch careers?

It is essential to understand that in a novated lease, it is your responsibility to transfer the lease, settle the vehicle, or make arrangements for future payments if you experience job loss, change jobs, or retire.

Pearce emphasizes the significance of comprehending the conditions of your lease and the potential outcomes in the event that you are unable to secure a new job or your new employer is unwilling to assume the lease.

Is it possible for me to purchase any electric vehicle to take advantage of the FBT exemption?

The maximum FBT benefits for luxury cars have been limited by the government to match the luxury car tax threshold of $89,332 for the upcoming financial year of 2023-2024.

The exemption for FBT also extends to used electric vehicles. However, these vehicles must have been initially registered after 1 July 2022 and never incurred any luxury car tax.

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Source: theguardian.com