If you want to own a car as an international graduate in Australia, one financing option that you should seriously consider if you want to save money is a novated lease arrangement.
With a novated lease, you can save money while still keeping the benefits of car ownership later along the term.
For the uninitiated, this arrangement is a three-way agreement with your employer and a leasing company in which your employer pays the novated lease using your pre-taxed salary. You get to drive and operate the car for personal or business purposes as they do.
This arrangement reduces your income tax bracket, which helps lower the amount of money you’ll end up paying for your car.
Furthermore, this lease also covers the bulk of your car-related expenses, such as fuel and maintenance.
With this lease, the flexibility of your financial situation swings wide open, which is especially useful for a full-time student entering the workforce in Australia.
Keen to learn more about the benefits of this arrangement? Let’s explore these benefits in more depth.
1. Tax Savings
The primary benefit of opting for a novated lease agreement is the tax savings you incur. As you’re well aware, a higher monthly income also puts you in a higher tax bracket in Australia (and many other countries follow this rule as well).
This means that the higher you are on the income ladder, the greater your tax cut will be. For instance, if you’re expected to earn a taxable income of $130,000 AUD annually, you’ll be met with a 37% income tax. This applies to international graduates as much as every other citizen from Australia. However, the rates will be different for locally-born citizens and non-residents.
With a novated lease agreement, you won’t have to be burdened by this tax rate for your upcoming car purchase because it takes into account your pre-tax income. This means that your net monthly income—which is the amount of salary you’re actually getting post-tax—won’t be a consideration for you, your employer, and the lender in the procurement of your car.
This is a good thing, as you’re essentially saving money by lowering your tax obligations and paying your car in the process.
Let’s assume again that your annual taxable income is $130,000 and that you’re not officially recognised as a resident in Australia. Only this time, you’re entering a novated lease agreement with your employer and a lender—and the agreement is that you have to pay $10,000 annually for the car until the lease ends.
Given that your income is deducted before your income gets taxed, this means that you’ll be placed in a lower taxable income tier bracket—$120,000 AUD. In Australia as a non-resident, this would turn your $37% tax burden into a lower 32%. This is the equivalent of saving thousands of dollars on taxes, all through a legitimate tax avoidance strategy.
Want to learn more? Read the pros and cons of novated leasing.
2. No Upfront Car Costs
As an international graduate, you likely won’t be as stable as the locals once you arrive in Australia. You’ll have to start from the ground up, and unless you’re a savant in your field or have a lot of savings from back home, this can be a very expensive and difficult ordeal.
To add to the extensive list of tasks when migrating to a new country, shouldering the cost of a car through the traditional way of paying a 20% down payment can be costly. This is especially true for international graduates who may still be establishing themselves in the country.
Car costs could go upwards of the tens of thousands, and this doesn’t even include all the car-related expenses that go with car ownership yet—such as stamp duty, vehicle registration, and insurance.
If you want to get all the benefits of a car without spending thousands of dollars yet, then entering a novated lease agreement may be the best course of action.
Through this scheme, you can benefit from having a car immediately—and you won’t have to worry about setting aside a budget for a car mortgage because your employer is handling that for you.
This not only frees up your mind from budgeting for a major cost, but it also makes it easier for you to transition to entering the workforce in Australia smoothly.
3. Bundled Car Expenses
There are a lot of expenses that come with car ownership. It can be dizzying having to account for them all and pay them separately, especially as a foreign resident. Fortunately, with a novated lease agreement, this won’t be a problem.
A novated lease agreement combines fuel, maintenance, insurance, and registration costs into one payment. Just like the purchase price of the car, these are considered part of your pre-tax income, which can reduce your tax obligations further.
Having all your car expenses bundled in one package can make transitioning to life in Australia much easier for international graduates as it takes away the need to constantly be on top of your car bills. This increased efficiency makes car ownership an attractive and convenient option for international graduates—especially those who are in Australia for the long term.
4. Flexible End of Contract Options
Another fantastic reason international graduates should consider a novated lease agreement is the range of options that follow the end of the contract.
Typically, buying a car in the traditional way means that it’s forever yours until you sell it. This means you’ll have to shoulder the depreciation costs of the vehicle and pay for its maintenance fees out of pocket. However, this is not the case for cars arranged in a novated lease agreement.
If you have an activated novated lease, once its contract ends, you have three pathways you can take. These are:
- To end the contract and return the car
- To pay a pre-agreed lump sum payment to keep the car
- To buy a new car with the residual value
This means that you’re not tied to your car once your contract’s terms are over. This flexibility allows international graduates to easily switch up their car ownership based on their circumstances and future plans.
5. GST Savings on the Car Purchase
The cost savings aren’t only applicable to your pre-tax salary deductions; they also extend to the Goods and Services Tax (GST) on the car purchase itself.
Typically, Australia imposes a 10% GST on goods like brand-new vehicles. This can translate to thousands of dollars in taxes on top of the car’s original price.
When you enter a novated lease agreement, you are no longer obligated to pay for this GST rate. This essentially shaves 10% off your car’s upfront price, which can result in significant savings.
This GST exemption also affects the car owner’s car-related expenses such as fuel, maintenance, and insurance. This can help international graduates save a significant chunk of money for other things that may need their attention.
6. Easy to Transfer Lease Arrangement
Everyone’s career pathway is different, international graduates being no exemption to this rule. If you and your current employer decide to part ways, it may seem as if your novated lease agreement is as good as done.
Fortunately, that’s not the case.
If you switch jobs, your lease arrangement can easily be transferred to your new employer, granted that they also support a novated lease agreement. This exchange can be done with no extra costs or penalties on your and your employer’s part.
And on the off-chance that your new employer won’t accept the novated lease agreement, you can pay the novated lease directly in your old employer’s name. Sure, this would mean that you’ll have to budget for it, but it would also mean you’re benefiting from a lower car purchase cost due to their associated tax exemptions.
We hope this article helped you understand the benefits of a novated lease. Best of luck with your next car purchase!