Car leasing is becoming increasingly popular in Australia. Essentially, it means you rent your car, so you don’t ever actually own it.
There are four main types of leases in Australia and deciding which option is best for you can quickly become confusing. Some options are better for business owners, while others for salaried employees. There are a whole range of benefits as well as some restrictions.
In Australia, we have four main types of car leasing options available to us. Navigating the options can be confusing, so here’s a brief rundown to simplify things:
FINANCE LEASE
Finance lease options are mostly used by businesses. In this scenario, the vehicle is actually bought by a financier and then rented out to the lessee for a monthly instalment. At the end of the lease term the residual amount still owed is the responsibility of the lessee. The car owner may cash out from personal or borrowed funds, owning the car outright, or trade in the vehicle and start a new lease.
OPERATING LEASE
Essentially the same as a finance lease, except that at the end of the lease term the lessee is not responsible for the residual left on the vehicle as the vehicle is returned to the financier. Tyres, petrol and maintenance costs can also be included as an all-inclusive package. While operating leases can be great for budgeting, be aware that you may end up paying more. You will have no control over expenses and the financier will definitely take a cut. You may also have restrictions on the number of kilometres you can drive and the modifications you can make to the car.
NOVATED LEASE
Novated leases are available to some salaried employees. It allows you to use pre-tax income to make lease payments on your vehicles. An agreement is made between the lessee, their employer and a financier. By using your pre-tax income, your taxable income is reduced. Some novated lease agreements even include regular operating costs like tyres, fuel and servicing, again reducing your taxable income. It sounds amazing, however a Fringe Benefit Tax (FBT) is also payable and FBT rates have increased in recent years unfortunately negating a lot of the benefits of novated leases.
CHATTEL MORTGAGE
In a chattel mortgage you, rather than the financier, own your car. It’s a popular alternative to a traditional lease where you essentially take out a mortgage, using the car as security. This is a popular option for small businesses as the total GST of the purchase price can be claimed in one lump sum when the car is purchased! Then, interest and depreciation costs can also be claimed – another win for small businesses. Like a lease, a residual can be negotiated to reduce the monthly repayments, which will then need to be financed at the end of the term, or a new lease started on a new car.
Whether you buy or lease your next car will come down to your personal preferences. Often, leasing is the best option for people who can claim business expenses, want lower monthly repayments and/or want to turn over their car on a regular basis. Before making a decision, it’s worth weighing up the costs against each option and, if you will be using the car for business purposes, it’s definitely worthwhile speaking to an accountant to work out the option and terms that best suit your circumstances.
For more information on whether buying or leasing is right for you, check out my article on Car Leasing Vs Buying.
