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Chapter 1: What factors are driving the spike in EV ownership?
Welcome to How Do They Afford That, the podcast that peeks into the financial lives of everyday Australians. I'm Michael Thompson. I'm an author and the co-host of the business news podcast, Fear and Greed.
As always, I'm with Canna Campbell, financial planner and founder of Sugar Mama TV, the financial literacy platform covering YouTube, podcasts, Instagram, threads, TikTok and books like our upcoming book, 12 Months to Financial Freedom. Not long to go now, coming out in September. Are you excited about it, Canna?
I am. And if you haven't ordered a copy yet, you get onto it straight away because this is going to really transform your financial future.
I like that.
Chapter 2: What is a novated lease and how does it work?
I'm really proud of what we've done, and it's so easy to follow along. Everything's broken down into bite-sized baby steps, and it's just clean and clear. You'll know exactly what to do, but you understand why you're doing it and the benefit.
And no matter where you're at as well in your life, career, money, there is something in there for you.
And you take it at your own pace. Yes.
Yes. Anyway, there is a link to pre-order in the show notes, but you can also just find 12 Months to Financial Freedom wherever you order books online. Go into your bookshop and tell them to order it in for you. Coming out in September. Anyway, today's episode, Canna, is very much, I would say, driven... That's a pun, but you won't understand the pun until you hear what the topic is.
Unless you've read the title of the podcast.
Oh, that too. Yeah, good point, good point. It is driven by the cost of living, right, and the cost of filling up a car with petrol or diesel, which really, really hurt earlier this year when almost overnight...
prices shot up and what was kind of maybe um a hundred dollars i'm thinking about my car diesel right diesel too yeah and it was it was 110 to fill that the tank suddenly went up to 200 plus And it hurt. It really, really hurt. And perhaps unsurprisingly, electric vehicles have seen a big spike this year.
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Chapter 3: What costs are included in a novated lease for an EV?
And with them, there's also a lot of talk about the use of novated leases in order to get your hands on an EV. My confession is that I've never really understood car leases. It's always been a little bit kind of confusing and I get the concept. I've tried to look into them, thinking that it might be a better way for me to do it, that I can use it to get a new car.
I've never actually done it in the end because I can't quite figure out if it's good for my budget, if I'm going to drive enough to make it worthwhile, all of these bits and pieces. So today, that's what we're going to work our way through to figure out whether a novated lease is a good idea To get you behind the wheel of an EV?
And of a fuel-efficient EV, yeah.
Yeah, indeed. Okay. To help save money. Correct. Let's start at the very beginning. What is a lease?
So a no-fated lease is a three-way agreement between yourself, your employer, and the leasing company. And it's a car financing agreement. And your employer makes payments on your behalf, which is deducted from your salary. A little bit like salary sacrificing. It's taken with pre-tax dollars.
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Chapter 4: What are the tax incentives for leasing an EV?
But it's used to pay for the car.
Okay, that is important that it comes out of your pre-tax earnings. Pre-tax.
So you're taking less in your net pay in order to package the car in.
Okay. And so how does that actually work? Then you make the deal first or you go to it. There are companies that run novated leasing?
Yes. So your employer will normally have a novated company that has a list of cars and you select a car from their list available. And that's also really important because they may not necessarily have the car that you really want on that list. And then the lease company purchases it.
But you then rent it over a fixed term, which is typically between sort of anywhere between two to five years, but I believe four years is the sort of sweet spot that most people tend to pick. But the thing with a novated lease is you're not just – packaging the car, like the cost of the car, you're also including in it the running costs.
So the fuel, the electricity, the rego, the insurance, you know, the maintenance, like tires. So it's all combined very neatly into one regular payment. But you, more often than not, have a balloon or what we call a residual payment at the end.
So for example, you might buy a car for say $60,000, but the residual amount may be say $20,000 after year four or year five, depending on the terms and conditions.
Okay. In terms then of the costs, you are going to be paying weekly. How much are we talking? Well, it depends on the cost of the car. Okay. All right. Well, can we break it down then slightly a little bit more? What is included in this lease?
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Chapter 5: Who is suited for a novated lease on an EV?
Then, of course, interest, because these no bed lease companies don't need to make money. Insurance. Yeah. Then rego, maintenance, and, of course, any sort of management fees that the no bed lease company may charge. And it does feel very simple, but it doesn't necessarily mean it's cheap.
What about fuel? Yes. Assuming that it's, sorry, assuming that this is not just a lease for an EV. Yeah. And so all of the running costs.
Yes. So you'd have to know roughly how much driving you do per year so they can work out the right amount of obviously wear and tear on the car, how much fuel, how often you need to get it serviced and things like tyres being replaced or brake pads.
Yeah.
Okay. And then you are paying this weekly or fortnightly or monthly or whatever it is coming out of your pre-tax pay. And then at the end of the lease period, there is a balloon payment that you have to pay if you want to keep the car, but you don't have to keep the car?
So no, the balloon payment, you've got a few different options. And again, it comes down to the fine print and getting some advice. So some people will actually roll that over and take out a new lease on that balloon payment. Some people will hand the car back and pay out the difference.
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Chapter 6: Who should avoid leasing an EV?
Some people will sell it. I've even seen a couple, not often, but there were situations where people would sell it and actually end up with some money. But a lot of people tend to roll it forward. They'll upgrade the car.
Okay. All right. Why are people so interested then in novated leases for EVs at the moment? It goes, and it's a leading question here, because I know that it does go beyond just the fact that there is demand for EVs because petrol prices are so high. There are some other incentives.
Well, the government incentives are probably the biggest one here. So in Australia, many EVs that are on a notavated lease are FBT free. So fringe benefits tax is not charged when you take a notavated lease on an EV. And this can significantly reduce the cost. because you're not having to pay fringe benefits tax, which is huge.
Also, you know, you've got obviously the lower running costs, no petrol, less maintenance. There's obviously, again, not everyone agrees with this, the environmental appeal. And, you know, it looks like, you know, you are being very responsible and respectful to the planet. And, you know, I've never seen so many smug EV vehicle drivers.
Like even one of my girlfriends said, I've never been prouder of the fact I bought a Tesla four years ago.
zip down that freeway feeling really smug really smug i mean but that's also been that's been the case since the prius first kind of drove around what 20 years ago or something there's always been this slight kind of look in their eyes going i'm doing more for the planet than you are
Tax incentives definitely can make something look a lot more attractive, but they don't necessarily make it the best option for you.
Who is it suited to? Because... Yeah. I'm thinking about me and I'm thinking about how much I drive, which is not actually that much anymore. I do a lot of working from home. When I'm coming in here into the studio, I'll jump on the train. Really, we're probably kind of 10,000 Ks per year at most.
Yeah. I'm probably not too, like, I would be the same.
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Chapter 7: What are the risks associated with novated leases?
I think I worked between 12,000 to 15,000 a year.
Yeah. Yeah. And so is it suited then to people who are doing more? They're doing kind of 20, 30, 40. They're on the road all the time for work. They're traveling around a lot more. Who is it suited to?
Well, the most important thing to know and understand with this novated lease is you've got to have stable employment, you know, salaried obviously to make the repayments. But if you leave your employer or you're made redundant, this then potentially terminates the novated lease, which means you lose the tax benefits and you've also got to pay out.
So, if you don't have money set aside for that payout, you could put yourself under serious pressure. So, if you're going to do something like this, you've got to know you're going to be staying put with that particular employer for quite some time. Then, of course, and this is the bit of the, I guess, the...
I wouldn't say polarizing, but the controversial issue with these tax incentives is that a lot of people argue that these tax incentives are only for people on the top marginal tax rate because they're the ones that benefit the most from being fringe benefits tax-free. So you could say, well, they're the ones that will benefit first and foremost.
Then, of course, people who value convenience because it is neatly packaged in one repayment rather than having your CTP, your Obviously, CTP is third-party, but your comprehensive cover, the petrol, the maintenance, everything is grouped in the one repayment. And it makes it a lot easier to manage your budget, I will admit.
And people, obviously, who do need a car and a reasonably newish car, that's something that this may suit people. For example...
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Chapter 8: How can leasing an EV impact your financial future?
Not that I necessarily agree with this, but you'll see a lot of real estate agents tend to drive a new car. You don't tend to see them driving around in, say, a car like mine that's nine years old. Generally speaking, I know it's a huge assumption I'm making here, but people who do want, because it's part of what they do, have a newish, smart-looking car with the latest technology.
And of course, having predictable expenses is a good budget. They've got the cash flow to service this.
All right. Then who should avoid it? And based on just what you've said there, if you have unstable employment, that's one. What else?
People with a tight cash flow. The other day, someone actually who I know through work was saying, you know, should I be buying a new car? But I knew they were on a really tight budget and and had a lot of other things going. And I was like, absolutely not. This is the last thing on your list right now to be there. Because, well, think about it. You've got to find the repayment.
If you don't have that money, you know, say $250 a week or $500 a month or $700 a month, whatever it may be, you've got to make sure you can service that comfortably.
So you treat it, you have to look at it basically just as a loan. Yeah.
Exactly. And then think of it as a form of a responsibility. It's a repayment to a certain degree.
Okay. That makes sense.
But also, a lot of people don't realize this will impact your credit score. So, it will then impact your ability to borrow and how much you can borrow. So, if someone is thinking of looking at, say, moving home and upgrading the home or perhaps looking at a debt recycling strategy or perhaps looking at buying an investment property and is planning to take a new loan out...
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