Home Car Leasing A Complete Guide on a Novated Lease Calculation Formula in Australia

A Complete Guide on a Novated Lease Calculation Formula in Australia

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lease calculation formula

If you plan to get this option, you must familiarise yourself with the novated lease calculation formula.

Buying a car can be costly, but having a novated lease can make the process more manageable. A Novated Lease is an agreement between you (the employee), your employer, and a finance provider that allows you to purchase a car using pre-tax salary deductions from your employer.

The main benefit of a novated lease is that it provides tax savings opportunities because your salary deductions are pre-tax. By spreading out the cost of the car over a longer period, you will also be able to make smaller monthly payments than if you paid for it in one lump sum.

To calculate the exact amount of your payments and savings with a novated lease, it’s important to understand the lease calculation formula. Here’s a complete guide to understanding the calculation formula for novated leases in Australia.

1. Determine the cost of the car you want: The first step in calculating your novated lease payments is to determine the total cost of the car you want to purchase, including any additional fees or taxes.

2. Subtract any available discounts or rebates: If you qualify for any applicable discounts or rebates, subtract this amount from the total cost of the car.

3. Calculate the GST component of the car’s purchase price: The Goods and Services Tax (GST) is a consumption tax that applies to most goods and services purchased in Australia. When calculating your novated lease payments, you must determine the GST component of the car’s purchase price.

4. Calculate your novated lease payments: Once you have determined all applicable costs and taxes, you can calculate your lease payments using this simple formula: (Purchase Price + GST – Discounts) / Lease Term = Monthly Payment Amount.

5. Determine your total savings: To determine how much you will save with a novated lease, subtract your monthly payment from the pre-tax salary deductions from your employer that will be used to pay for the car. The difference is the amount of money you will save each month by spreading out the cost of the car over a longer period using a novated lease.

Why Leasing is Important than Buying? 

Leasing a car offers many advantages over purchasing one. As mentioned previously, leasing allows you to spread out the cost of the car over a longer period, meaning smaller monthly payments than if you paid for it in one lump sum. Leasing also provides tax savings opportunities because your salary deductions are pre-tax. Additionally, leasing generally requires less paperwork and fewer upfront costs than purchasing a car. Finally, leased cars come with better warranties and maintenance packages than those purchased outright. For these reasons, many people explore the lease calculation formula in getting a car rather than buying it. 

Leasing also benefits employers; it enables them to provide employee benefits without increasing payroll taxes or impacting their budget. By providing employees with novated leases, employers can offer their employees a valuable perk that could potentially help them recruit and retain talent. 

Ultimately, novated leases provide numerous benefits for both employers and employees alike. By understanding the novated lease calculation formula in Australia, you can confidently calculate your payments and savings and decide whether leasing is right for you. 

A novated lease involves three parties: the employee, their employer, and a finance provider. The employee selects a car they want to purchase and then agrees with their employer and the finance provider. Under the terms of this agreement, the employee’s pre-tax salary deductions will be used to pay for monthly instalments on the car.

Additionally, the employee’s employer will pay all GST upfront and reimburse themselves through salary deductions. This arrangement allows the employee to benefit from tax savings on car payments, reducing their taxable income and giving them more money to spend each month.

When the lease ends, the employee can sell or return the car. The amount they receive for selling it will depend on its condition when they return it. If the car is in good condition, the employee may receive a portion of their original deposit back from the finance provider.