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:
- finance car lease
- operating car lease
- novated lease
- chattel mortgage finance
- hire purchase
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
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 of the vehicle.
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.
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.
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' (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 GST to claim it back on the vehicle purchase price in their next Business Activity Statement.
To understand which vehicle financing option best suits your business, talk to an MFAA Accredited Finance Broker.