Should I Lease my Company Cars?
Many small business operators choose to lease rather than purchase their company cars because it's better for their cash flow.
Some of the common vehicle finance options include:
- Car lease
- Operating car lease
- Novated lease
- Chattel mortgage finance
- Hire purchase
- Car lease
If you take out a car lease, the lender agrees to rent the vehicle to you for a set period for an agreed (generally monthly) amount. If the vehicle is entirely for business purposes, the lease payments are completely tax deductible.
Operating lease vs finance lease - what's the difference?
With a car lease, you have two options: an operating lease or a finance lease.
- At the end of a finance lease, you pay a residual lump sum - an agreed value of the depreciated cost of the vehicle - and assume ownership.
- At the end of an operating lease, you return the goods and do not have to pay the residual payment and the lender retains ownership.
Operating lease vs finance lease - which is right for me?
Choosing between an operating lease and a finance lease depends on your situation. An operating lease is effectively a rental arrangement with no liability to you at the end of the term, whereas a finance lease has a residual amount that is your responsibility whether you retain goods or return them to the lender.
There is also an accounting difference, with operating leases being off balance sheet while finance leases are recorded on the business balance sheet. To understand which car leasing option best suits your business, talk to us.
Fully maintained car leases
With a fully maintained car lease, the ongoing vehicle maintenance charges are included. You can also include tyres and fuel and you pay a higher lease rental.
Under a novated lease, an employee makes an agreement with the Lender for the finance of a vehicle. The employer then takes the repayments out of the employee's pre-tax salary. If the employee changes jobs, they take the car with them.
Commercial hire purchase
Commercial hire purchase is like a car lease in that you pay "rent" over the repayment term. The difference is that you gain equity as you make payments and title passes to you with the last repayment. A commercial hire purchase agreement can be structured with or without a "balloon" payment ie an additional lump sum payment to be made at the end of the lease.
Chattel mortgage finance
Chattel mortgage finance is a car loan that allows a business using the "cash" method of accounting for the Goods & Services Tax to claim back the GST on the vehicle purchase price in their next Business Activity Statement.
I'm not a business owner - should I lease also?
Leasing a car is tax-effective for most people. In your own life or business, you should set things up so that all (or some) car costs are tax deductible. This includes a spouse’s car and any kids’ cars. These two articles caught my eye and explains how salary packaging a car saves tax.
Good articles on salary packaging
- Age article 7 February 2016 by John Collette "Leases drive home considerable savings"
- How salary packaging can save tax for your employees, an article by Paul Hockridge dated 16th December 2015.
Two cars are discussed as well: there is no limit on the number of company cars able to be packaged (i.e. one for you and one for your partner). Both articles explain how the tax savings apply even for low and or average income earners.
HOW WE SUPPORT CLIENTS
At Profy Finance and Wealth, we have supported business and clients who are looking to finance assets and vehilcles, through:
- Helping them get clear on their objectives
- Arrangement and recommendation of leases and finance to suit their situation
- Ensuring financial affiars are structured effectively
- Asset insurance from preferred suppliers
- Helping them plan for any taxation outcomes
- Business structure advice and planning to maximise business wealth
- Wealth planning, investing, and retirement
At Profy Finance and Wealth, we cover financial advice and mortgage & finance broking to get more holistic results for our clients. Learn more about how we could help...