New Car or Used? Making the right choice

It’s a nice feeling driving out of the car yard in a brand new car, though it’s not a nice feeling knowing that as soon as you drive off the block a new car depreciate in value immediately.
When buying for private use and not for business you may not be able to claim depreciation as a tax deduction. This is a cost that should be considered when buying a new car. Many people ignore this substantial cost because it is a cost that you may be unaware of. A new car loses about 40% of its value in the first three years of its life.

It is increasingly the case, especially in these trying economic times, that the smart buyer purchases a new vehicle with one eye firmly on its residual value. It's almost proverbial these days that, as investment choices go, a car is right up there with stocks in prestigious, third generation American investment banks – not good, that is to say. The second you ease the new car out of the dealer's yard you start losing money, since with the flick of the ignition your car has made the transition from 'new' to 'second-hand'.

Business Car Loan pre-approval

Requesting your car finance with Madison Finance before purchase of a new or used car is a good financial investment.

The convenience of purchasing your vehicle from a car dealer may be enticing but the repercussion would mean costing you an additional amount to your expenditure.

Finance broker

Banks and car dealerships uphold the prevailing control over the availability of car finance which prevailed for a long time. But in the last five years, contemporary and newer choices have sprung out in for car financing.

Guidelines in purchasing a car

A sense of freedom, mobility and pleasure are what cars have to offer. So before you take the plunge in purchasing your car, every option should be explored. Here are a couple of helpful tips you need to consider when acquiring a car from new or used, insurance and finance options.

What is a Novated Lease?

A Novated Lease is a contract that exists between the employee, their employer and the finance provider.

Novation is the replacement of a new contract in place of an old one - the employee leases a vehicle from the lease company, and the employer consents to take on the employee's obligations under the lease. The employer then makes the lease payments to the finance company on behalf of the employee, and deducts them out of the employee's salary. Normally, employers provide these vehicles as a part of a salary package they offer.

How does it work?

If Novated lease is part of the salary packaging option your employer offers, you have the privilege to choose a vehicle that will best suit your preference and lifestyle. You can choose among the wide array of different makes and models or whether it is brand new or second hand. All you have to do is enter into a finance agreement in your own name and once approved, you have immediate possession of the vehicle and you can use it as you wish.

Once the vehicle has been purchased, the employee, the employer and the finance provider all sign the Novation Agreement. The employer will assume all responsibilities pertaining to the repayments of the vehicle which will be deducted from the employee’s salary.

The employee agrees to give a portion of his salary and use it to make repayments for the vehicle he got under a novated lease. In this car finance option, the leased amount, running costs of the vehicle and Fringe Benefits Tax (FBT) are deducted from the employee’s pre-tax earnings, and PAYG income tax is calculated on your reduced salary. This will allow for a lower taxable income so the employee can benefit from the reduced tax.

Types of Novated Lease

There are two main types of Novated Lease - Fully Maintained, and Non-Maintained. Some employers may offer both choices, while other employers offer only one. Some don't even offer a Novated Leasing option to their employees at all. If your employer is one of those kinds who doesn't offer Novated Leases, or only offers you a limited choice, Consult different leasing companies so they may help you get a better novated lease option with your employer.

Fully Maintained Novated Lease

Under a Fully Maintained Novated Lease, all operating costs for the vehicle are included as part of your salary package. The package for the operating costs may include:

• Leased amount
• Fuel and oil
• Service and maintenance of the vehicle
• Registration
• Tires
• Comprehensive insurance
• Other types of insurance
• Accident management
• Operating Costs and Fringe Benefits Tax reporting

With a Fully Maintained Novated Lease you will be worry free since all of the operating cost of the vehicle will be covered and managed on your behalf. All these expenses including Fringe Benefits Tax (FBT) will be deducted from your earnings.

Non-Maintained Novated Lease

Under a Non-Maintained Novated Lease, all running costs and maintenance of the vehicle will be shouldered by you. The only finance you will get is the lease amount for purchasing the vehicle as well as any applicable Fringe Benefits Tax (FBT). These again will be deducted from your pay. Any other expense for the vehicle aside from these will need to come out of your own pocket.

Benefits of a Novated Lease

For the Employee:

• You gain full ownership of the vehicle upon commencement of the lease agreement and you may utilize it however you want to.
• Flexible lease terms ranging from 24 to 60 months.
• You can save a lot of money from the tax you need to pay since the monthly repayments for the vehicle will be deducted from your pre-tax income. Thus, letting you enjoy a lower tax rate as opposed to when you make the repayments using your after tax income.
• You have the freedom to choose the vehicle that suits your taste and lifestyle.
• The vehicle stays with the employee even if he decides to switch employers in the future and the term of the novated lease is not yet finished. The new employer can take over the novated lease agreement and continue making the monthly repayments on behalf of the employee.
• An Input Tax Credit (ITC) is applied by the financier which aims to remove the GST from the amount financed. This will make your repayments lower as you finance a reduced, GST-exclusive amount.
• Fixed lease repayments for the term of the lease.
• Flexible lease residuals may be selected but still bearing in mind the Australian Tax Office (ATO) minimum residual guidelines for leases and the financier's maximum residual guidelines.

For the Employer:

• The ability to provide a more attractive compensation package to employees at little-or-no cost to your business.
• Removal of the residual-value risk of a company fleet.
• The employer is not held liable for the vehicle and whatever remaining repayments if an employee leaves the company.
• Vehicles provided under a Novated Lease are "off balance sheet" - neither an asset nor a liability.
• Reduced Payroll Tax and Work Cover premiums.

How a Novated Lease operates day-to-day

Fully Maintained Novated Lease

Fully Maintained Novated Leases are intended to make your life as a car owner as easy as possible. Under a Fully Maintained Novated Lease, the monthly repayment amount is deducted from your salary every pay day to cover the lease and operating costs of your vehicle, and any FBT payable.

If your vehicle’s operating cost is higher than expected you will be asked to increase the amount of your monthly repayments to your account your account to meet the shortfall. On the other hand, if you vehicle’s operating cost is less than expected, you will be reimbursed with the excess payments you have made.

These are some of the convenient day-to-day inclusions in your Fully Maintained Novated Lease:

• Fill up with a fuel card: By simply presenting your fuel card to any participating service stations you may quickly and easily purchase fuel. The fuel card also entitles you to a discount and will automatically be logged for your quarterly driver reports.
• Call for assistance: A 24-hour Roadside Assistance is available to help you get back on the road as quickly as possible. Dead battery, flat tire, or something more serious like mechanical problems, you may call out an expert toll free.
• No high maintenance anxiety: You never have to worry about the cost or quality of your vehicle's maintenance again. The cost of maintenance will come from the funds that are already deposited into your salary packaging account. It is controlled from all angles which aim to ensure that you are receiving a negotiated discount and that labor and cost of parts are according to what the manufacturer recommended.
• Minimize accident impact: In cases of an accident, you will be given some advice and support you need. Emergency services will be informed, arrange towing, liaise with insurers and monitor repairs, minimizing the impact for you.
• Automatic registration renewal: The annual renewal will be taken care of on your behalf and all you have to do is simply collect the sticker from your mailbox and apply to the windscreen.

Non-maintained Novated Lease

Under a Non-maintained Novated Lease, your monthly lease repayments are deducted from your salary every pay day to cover the lease costs of your vehicle and any FBT payable. Whatever amount used for paying the operating cost and maintenance of your vehicle will come out from your own pocket.

You get the benefit of any tax savings since the lease repayments will be deducted from your pre-taxed salary amount, and you retain control of your service, maintenance and other operating expenses of your vehicle.

What is Fringe Benefits Tax (FBT)?

Whenever an employee receives a benefit from his employer as part of their employment, the benefit may be subject to Fringe Benefits Tax (FBT). Fringe Benefits Tax is a Federal Government tax payable on the value of certain fringe benefits. A vehicle leased under a salary packaging is treated for FBT purposes and therefore may have applicable taxes.

Statutory Formula method is used as a means of calculating the FBT of a vehicle which is salary packaged via a Novated Lease.

To calculate the FBT payable each year, a Statutory Percentage is applied to the vehicle’s FBT Base Value (purchase price minus government charges). Multiply this by the number of days the vehicle is accessible to the employee, grossed-up by be a factor (generally 2.064) and then multiplied by the FBT Rate (presently at 46.5%)

The Statutory Percentage is based on the kilometers travelled by the vehicle per year as per Table 1, below:

Table 1: Statutory Percentages Kilometers travelled Statutory Percentage Less than 15,000km per annum 26% 15,000 km to 24,999km per annum 20% 25,000 km to 40,000 km per annum 11% More than 40,000 km per annum 7%

Novated Lease using Statutory Formula method is characteristically desirable for employees who have minimal or no business use and travel high kilometers each year since no distinction is made between business and private use.

Calculating Fringe Benefits Tax (FBT) - an example

Using the Statutory Formula method, the Fringe Benefits Tax (FBT) payable on a Novated Lease vehicle is determined by the vehicle's FBT Base Value, the Statutory Percentage, the number of days the vehicle is available for use by the employee, a gross-up factor and the current FBT Rate.

Firstly, the Taxable Value of the vehicle is calculated:

Table 2: Calculating Taxable Value

FBT Base Value (price ex. reg. & stamp duty) $50,000.00 Statutory Percentage (assuming 20,000km per annum) 20% Days the vehicle is available for use by employee (assuming non-leap year) 365 days Days in the full FBT year (assuming non-leap year)

365 days Taxable Value

= FBT Base Value x Statutory Percent x Days available / Days in FBT year = $50,000.00 x 20% x 365 / 365 = $10,000.00

Using this Taxable Value, the remainder of the Statutory Formula is applied as follows:

Table 3: Calculating FBT Payable Taxable Value $10,000.00 Gross-up Factor 2.0647 FBT Rate 46.5%

Fringe Benefits Tax (per annum)

Taxable Value x Gross-up Factor x FBT Rate = $10,000.00 x 2.0647 x 46.5% = $9,600.85

Once the estimated Fringe Benefits Tax (FBT) liability is determined, from the employee’s salary package the cost and the vehicle’s operating cost shall be deducted. Through this setting the FBT liability will be fully subsidize from their salary package on the condition that the designated kilometers are realized.

The estimate of the number of kilometers travelled each year must be of utmost importance accurate. It may prompt the employee to pay in excess any increase in FBT if the required kilometers was not attained thus justifying the substantial impact of accuracy.

One more essential thing to note is that the FBT year operates between the 1st of April and 31st of March of the following year. Consequently, in the first and last FBT year that you have use of the vehicle, your kilometers are calculated on a pro-rata basis. As an example:

Table 3: Estimating Pro-rata Required Kilometers

Lease start date 1st of October 2008 Days remaining in FBT year (assuming non-leap year) 182 days Days in the full FBT year (assuming non-leap year) 365 days Estimated kilometers (per annum)

25,000 Required kilometers (to travel by 31/03/2009)

KM per annum x Days remaining / Days in FBT year = 25,000 x 182 / 365 = 12,466 km

What is the Employee Contribution Method (ECM)?

The Employee Contribution Method (ECM) facilitates an employee to condense their FBT liability by assembling post-tax contributions towards the operating expenditure of the vehicle. The recommended method is to factor in an amount equivalent to the Taxable Value of the vehicle in so doing trimming the Taxable Value to zero. Granting the employee travels the designated kilometers per annum, this condense the FBT liability to zero.

"Why should there be an after tax payments made towards my vehicle when salary packaging is supposed to reduce my gross salary so that I pay less income tax?"

This is a common question. The straightforward answer to this question is that an employee who’s payment is made after tax towards the running cost of the vehicle can reduce the rate of FBT from 46.5 % to their own marginal income tax rate. Rate may vary either 30% or 41.5 %. Consequently, the overall cost of salary packaging of their vehicle is reduced while the total tax benefit available to them is enhanced.

The Employee Contribution Method (ECM) can be applied to both a Fully Maintained Novated Lease and a Non-Maintained Novated Lease.

A.

Fully Maintained Novated Lease, the required amount of employee post-tax contribution is calculated as part of the package and shown in the Salary Package Confirmed Estimate.

B.

Non-Maintained Novated Lease, the employee files the receipts for operating costs that they have paid themselves, and forward these (along with a Vehicle Declaration Form) to their employer at the end of the FBT year - 31st March. On the employer’s part, there will be adjustment on the Taxable Value of the vehicle by the amount of the receipts, removing either partial or all of the FBT liability from your salary package.

What is the effect of GST on a Novated Lease?

GST is payable on the sale on most new and used vehicles where the seller is registered for GST (e.g. a dealership). With a leased vehicle, the vehicle is bought by the financier who then in turn leases it to you. The finance provider makes the full payment amount of the sale price of the vehicle to the supplier, who then passes the GST on to the Australian Tax Office. As GST cannot be paid twice on the same transaction, the financier claims the GST component that they have paid to the supplier back from the ATO (up to a maximum of $5,198.18 for the 2008-2009 Financial Year). This refund of the GST is known as an Input Tax Credit (ITC).

As a result of claiming an ITC, the GST on your vehicle is reduced or eliminated, and the financier essentially leases the vehicle to you at the full sale price less the GST component. In addition to the GST on the sale price of the vehicle, GST is payable on lease and operating costs, however these are refunded back to you as your employer claims an Input Tax Credit, therefore making your Novated Lease exclusive of GST. GST will only become payable if:

• You cancel the Novated Lease arrangement and continue to pay the lease payments yourself.
• The lease is terminated early (GST is payable on the payout amount).
• The lease reaches maturity and the residual falls due (GST is payable on the residual and is the responsibility of the employee).

The net effect is that under a Novated Lease you can save up to $5,198.18 on the price of your vehicle and benefit further from the operating costs being exclusive of GST, however you will have to pay GST on a residual when your finance arrangement comes to an end.

Simple steps to arranging a Novated Lease

Coordinating to Salary Package a vehicle via a Novated Lease is not complicated - just follow these simple steps:

Step 1 - Select your vehicle with the best price you could find and then get a written quote from your favored dealer. Double check the quote whether it includes a full break-up of the vehicle's price, options, on-road costs and GST – as these figures are substantial in order to arrange an accurate Salary Packaging Estimate. For vehicles that are second-hand (used rather than new), get confirmation of its model year, kilometers travelled and date of te last service that was completed on the vehicle.

Step 2 - Decide on the approximation of the number of kilometres you will journey per annum, and determine if you want a Fully Maintained Novated Lease or a Non-Maintained Novated Lease.

Step 3 – Get in touch with your Stratton Finance Consultant and request a prepared Salary Packaging Estimate, ensuring that you have the following information available:

• Complete and correct description of vehicle and pricing break-up
• Total kilometers travelled per year
• Annual gross salary (before-tax)
• Number of years you will want to take the lease over

Step 4 - Your Finance Consultant will provide a Salary Packaging Estimate illustrating the cost to fund and operate your chosen vehicle. This presentation of estimate will plainly show all the costs and savings consequential from the salary packaging of your vehicle.

Step 5 – If you’re already decided on the package presented, sign the Salary Packaging Estimate and ask your HR Manager to sign it and return it to your Finance Consultant.

Step 6 - Finalize an application for finance. Two ways for you to accomplish this is either over the phone or online which usually takes around 10 minutes to accomplish. This can be done over the phone or online and only takes about 10 minutes. Keep handy a copy of your driver licence and confirmation of income (recent payslip or Letter of Employment).

Step 7 – When the approval of your finance is released, proceed with the acquisition of the vehicle from your dealer after which you will submit to you Finance Consultant of the dealership sales person’s details. Generally, you would need to provide with a deposit on the vehicle if your dealer requires one, but you can request for a refund at the time of the delivery.

Step 8 – The finance and Novation documents will be sorted out by your Finance Consultant will prepare the finance and Novation documents and forward them to you and your HR Manager to sign.

Step 9 – All completed documents along with any other requested supporting documents must be submitted to the Finance Consultant. The Finance Consultant will coordinate and settle the finances with your dealer. An insurance Certificate of Currency (confirming comprehensive insurance cover) will be required to settle the finance - if you select a Fully Maintained Novated Lease the premium for this insurance can be included in the Lease's operating costs.

Step 10 – After the completion of the settlement, your Finance Consultant advises you and the dealer. This is now the time for you to collect the vehicle.

Step 11 - If you have chosen a Fully Maintained Novated Lease you will obtain your Driver Pack and Fuel Card, ordinarily within seven to ten working days.

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Commercial Hire Purchase

What is a Commercial Hire Purchase?
A Commercial Hire Purchase is a type of business car finance where the financier agrees to purchase the vehicle on behalf of the customer. In return, the customer hires it back from the financier by making set monthly repayments for a certain period of time. The term of the contract normally ranges from 12 to 60 months.