The advantage of leasing for companies or personally is that you’ll have lower monthly payments than financing because you are only paying for the use of it.
After the term has finished, you can either lease a new vehicle, purchase your current vehicle or return it.
There are generally two types of lease arrangement, operating lease and finance lease. Typically operating leases run for a period of 36 months with requirements to stipulate anticipated mileage at the commencement of the lease. There’s also no right of ownership at the end of the lease term.
A finance lease, also referred to as lease-to-buy is normally written over a 46 month term with an option to make an offer to purchase the vehicle at the end of the term. There’s need to stipulate mileage, and no penalty for excess mileage.
Leasing is the preferred option for many businesses for a number of reasons:
– Lease vehicles are fully tax deductible as an operating expense (but are eligible for personal usage and fringe-benefit deductions)
– Maintenance and insurance costs can often be covered in the monthly rental
– A fixed monthly cost of rental can be easier to budget within the business
– An operating lease means your vehicle will be recorded “off the balance sheet” which improves your business’s gearing ratio
– You have the option of upgrading your vehicle at the end of the lease term (or purchasing it outright for the residual cost in the case of a finance lease)
If you’re going to buy it in the business, you can either:
- Pay what’s called Fringe Benefit Tax (FBT) and claim 100% of the running costs of the car, regardless of whether or not you were using the car for business or personal use. Driving to Auckland for a holiday? If you’re paying FBT you can claim it. The amount of FBT you pay is based on (1) the value of the car and (2) how much you earn.
- Reimburse the business each year for 20% of the cost price of the vehicle. In this situation you’re also entitled to claim 100% of the running cost of the vehicle.
What may be the biggest factor in deciding to buy or lease is the current rate of car depreciation in New Zealand. It’s now not uncommon for a vehicle to lose half its market value within three years, so for many businesses the option of putting capital towards an asset that depreciates to this extent makes little sense.
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