Should I buy or lease cars and equipment?
Most people remember their first set of wheels. Car ownership in Australia is more prominent than house ownership and many people never consider leasing.
But for your company, it may be more profitable for you to lease cars and other equipment that depreciates.
Just a reminder, a lease is a series of payments you pay to a leasing company in exchange for the use of those goods.
Operating leases are a rental on a piece of equipment that will inevitably become obsolete.
This allows you to use the equipment and when you’re finished you take advantage of an expert in reselling or realising a better value for that equipment – rather than you buy it and then trying to dispose/sell it.
Gym equipment is one example of something that might work well with an operating lease.
An operating lease is also a good option if your vehicle is a tool of trade because your car is an expense. The lease money is a tax deduction and then you just give the vehicle back.
Mark Iriks, Managing Director of ‘easigroup’, says your lease payments would be far less than if you had taken out a car loan because you’re only paying for that portion of the vehicle you will use.
“If the car costs $30,000 and it’s going to be worth probably $10,000 in four years’ time, the leasing company will take a residual of more like $11,000-12,000 because they’re better at reselling it than you,” he says.
“So, you only pay it down to what it will be worth anyway, so it’s cheaper than buying a car.”
Pros of leasing vehicles
- the lease money is a full tax deduction for your company
- you’re not using your own cash for the outlay that you would if you bought it.
In business, cash is king and leasing helps the cashflow.
“When you buy a vehicle, you can only write off the depreciation and the interest component of the loan in a tax deduction,” he explains.
“I got into leasing because I never understood why anyone would put cash into an item that’s going to go down in value, I never understood that.
“I know a small business that owned every one of its cars. There were 40 cars that were in massive disrepair. The business owner was an older mechanic and all he and his son did was fix the cars and rent them with low money.
“He started leasing cars so he wasn’t tied up with repairs and maintenance. It cost him slightly more than it was costing him to repair all his cars. He was able to get 100 cars and it became a lot more profitable organisation due to that.
However, it is vital to understand and be content with the lease contract. You can find out more about operating leases from your accountant.
Cons of leasing vehicles
The disadvantages of operating leases are that the vehicles are not listed as an asset on accounting records.
Also, the records show the leasing as an expense and users of financial statements like to see companies having a higher net income.
In addition, depending on the duration of the lease, it can make it difficult for a company to plan long term.
Another thing to check for on your lease contract is how strict the company is about wear and tear on the vehicle.
If you are driving over lots of gravel roads, or are really hard on your vehicle, it might be worth checking out the rules around that.
Your company could consider novated leases, particularly if your employees are on higher salaries.
As an employer you could lease a vehicle for an employee and pay for that lease directly from their pre-tax dollars.
This benefits the employee because, to use an extreme, if they’re paying tax at 48 cents in the dollar, they get this saving on every dollar associated with buying and running the car.
As an employer, the GST on this lease arrangement is credited to you.
Also beneficial to you is that your employee’s reportable taxable salary will potentially decrease, and that could decrease your payroll tax liabilities as well as your workers compensation.