Employee perk ‘destroying people’s lives’

Aussie workers who have used a popular salary arrangement to score a new car have spoken out about their “nightmare” experiences.

EXCLUSIVE

More Aussie workers who have used a novated lease salary sacrificing arrangement to score a new car have spoken out about their “nightmare” experiences and the financial risks involved.

This follows a story published by news.com.au last week about a healthcare worker whose salary sacrificed car lease pushed her to “the edge of bankruptcy”.

Novated leasing is a finance arrangement between an employee, their employer and a leasing company that allows employees to part-pay for a new car lease from their pre-tax salary under a salary sacrificing arrangement, with the remainder payable from their take-home pay.

It’s pitched as a way for workers to reduce their tax payable, while also getting a new car, the cost of which is packaged up with extras such as insurance, extended warranties, roadside assistance, servicing and maintenance, fuel, tyres and incidentals, such as car washing and detailing.

In many cases, cheaper alternatives for these extras are available on the open market, and many novated lease deals also charge brokerage, fees, and large residual or balloon payments, with extremely high interest rates charged on the lot.

Lee Davis said using a novated lease to score a new car left him $100,000 poorer. Picture: Supplied.

Mining industry field service technician Lee Davis told news.com.au he bought a new 2015 Ford Ranger through a novated lease in an attempt to reduce his taxable income, while also buying a new car.

“Once the fees, charges and packaged fuel and maintenance payments were added, the repayment was almost half my wage,” he said, and due to a change in his financial circumstances six months later, he “could barely afford the massive repayments”.

Mr Davis said his lease provider “wouldn’t come to the party to work out an extended lease or anything to reduce the repayments, and wouldn’t negotiate”.

He said he then asked for a payout figure to get him out of the lease, which came in at $64,000.

“I couldn’t get my hands on the whole amount but managed to get around $56,000 together which I figured would get me out of trouble and make repayments more affordable, and leave less than $10,000 owing on the lease”.

Mr Davis said he had budgeted for the residual balloon payment based on the lump sum payment, and had no further contact with the company until they sent a debt collector after him.

His lease company claimed he still owed almost $35,000 because “paying the lump sum didn’t reduce my interest payments” and they wouldn’t “give me an interest discount on the lump payment”.

“They effectively charged me three years of interest on money I’d already paid back.”

“I had to sell the car for thousands of dollars under value to make the payment and when the dust settled I was about $100,000 poorer, with nothing to show for it.”

Mr Davis added: “Novated leasing is an absolute scam in my opinion.”

Novated leasing is promoted as a tax affective way to score a new car.

Emergency services worker Brett is also frustrated and financially hamstrung by his novated lease.

Brett, who requested his surname be withheld, told news.com.au his novated lease provider forgot to take his after-tax payments – which cover the vehicle’s running costs – for the first three months of the lease, a situation that has left him liable for fringe benefits tax (FBT).

“Regardless of how many times I contacted them, they still didn’t do it,” he said, adding that his lease provider never returned his phone calls, emails or online chat service contacts.

“With regards to my novated lease now, I have to pay insurance and registration out of my own pocket as the account is $3,780 in the red due to the FBT not being paid,” he said.

“I can’t sell the car because they have told me I will be up for a large FBT bill, so I’m now stuck for the next four and a half years with a company who can’t manage their own duties.

“I know of some other colleagues in very similar positions,” he added.

“There needs to be a massive investigation into the companies as they are regularly destroying people’s lives.”

Another consumer, who requested to remain anonymous, described their experiences with novated leasing as “a nightmare”.

They revealed they had made a complaint about their lease provider to the Australian Financial Complaints Authority citing “misleading information and lack of transparency that was only evident six months into my lease”.

The victim said that eventually, the lease provider “decided to settle and agreed to financial compensation which I am not allowed to disclose”.

A car industry worker with more than 20 years of experience claimed novated lease companies “play the taxation system to optimise profits” and told news.com.au he didn’t understand why anyone would take out a novated car lease.

“You are paying interest on services (oils and parts), tyres etc before using them,” he said.

“Why pay interest on something you don’t have or need.”

Alex and Julian Davis, co-founders of Leaselab, said that not all novated lease companies are guilty of misleading consumers. Picture: Leaselab

Alex and Julian Davis, co-founders of novated lease company Leaselab, said that not all companies in the industry operate the same way and that when managed correctly, novated leases are a great way for people to “save thousands”.

They said that customers of other lease providers being misled with hidden fees and charges resulting in bill shock “is a situation we hear of all too often”.

“Unfortunately, providers like this can attract clients with too-good-to-be-true deals that end up losing them money over the term of their lease.”

CEO of Novated Lease Australia Bevan Guest also acknowledged there were problems in the industry.

He said some novated leasing providers “offer cheap pricing to win the first few employees and try to lock [employers] into an exclusive contract, meaning your employees are unable to work with any other novated leasing provider.

“To make things worse, more often than not once an exclusive contract is signed, the pricing often creeps up with it,” Mr Guest said.

He also said that consumers “should be careful” of novated leasing policies that include insurance, which his company doesn’t include.

Novated leases are generally not regulated under the National Consumer Credit Protection Act, which applies to traditional car loans, as they are considered commercial contracts.

This means novated leasing companies are not required to comply with obligations not lend to customers where doing so would cause significant financial hardship, provide assistance to customers facing financial hardship or be a member of the Australian Financial Complaints Authority.

Many burnt consumers say they were unaware of the interest rate they were being charged, however, novated leasing firms don’t have to provide standardised disclosures in relation to the costs of finance or avoid conflicted commission arrangements.

CEO of Novated Lease Australia, Bevan Guest, acknowledged there were problems in the industry. Picture: Novated Lease Australia.

In a submission to a Senate Economics Legislation Committee considering the amendment of laws to encourage electric car take up, personal loan provider Plenti, whose products compete with novated leases, claimed that “novated leasing providers charge significant fees to employees, and are paid commissions from lease finance providers in the form of both upfront commissions and ongoing (or trail) commission”.

“These amounts can be significant and are often set by the novated lease provider at a level that seeks to ‘capture’ a substantial portion of any tax or GST benefits that would otherwise be available to an employee under a novated leasing arrangement.”

Plenti claims these fees and commissions can add up to 22 per cent, resulting in “higher monthly costs for employees compared to transparent financing arrangements such as consumer loans”.

“In many cases, the disclosure of these commissions and payments are opaque and presented in a non-standardised form.

“It can be very difficult for employees to understand how much a lease provider earns under a novated lease arrangement or to compare between lease plans to determine which may offer the best value to the customer,” Plenti concluded.