Getting good financial mileage from a company car

So you’re in the market for a new company car. Which is best – to buy or to lease? The short answer is, it’s complicated. 

On paper, buying is generally cheaper than leasing. Once the car loan is repaid, you own the asset and the longer you hold onto it, the better the return on your investment (keeping in mind the running costs of the vehicle are likely to increase as it gets older).

Buying a company car can be compared to buying a home. Mortgage payments might be higher than rent in the early years, but once you make that final repayment, it’s yours. The point where this comparison breaks down, however, is that houses usually steadily appreciate while vehicles depreciate significantly, especially in their early years.  

Leasing is like renting. You pay a fixed monthly rental for the term of the lease, typically between one and five years, and the financier retains ownership. At the end of the lease, you can pay a residual amount and take ownership of the car, trade it in for a new car, or refinance the residual and continue the lease. 
 
“A lot of people like leasing because you can have a brand new car then walk away at the end of the lease and get another brand new car.”

Cost isn’t everything

So, if buying makes more financial sense, why do so many businesspeople lease? 

“It’s not just about cost but image”, explains Paul Drum, head of tax policy at CPA Australia.

Say you’re in the business of selling luxury goods or services to a well-heeled clientele. You won’t want to be seen around town in an old ute; you’ll want a car that portrays an image of success. 

“A lot of people like leasing because you can have a brand new car then walk away at the end of the lease and get another brand new car,” says Drum.

Maximise tax deductions

If the taxman can help offset the cost of keeping up appearances, so much the better.

If your company car is used solely for business, your company can claim tax deductions for all running costs. This may include depreciation, fuel, maintenance, registration, CTP and comprehensive car insurance. Lease payments are often deductible too, depending on your lease arrangement, whereas repayments of principal on a car lease or loan are not.

It’s a little more complicated if you also use the company car for personal activities. If that’s the case, you can only claim deductions for the business portion. In addition, if you buy or lease through a company Fringe Benefits Tax may be payable on the private portion. 

“If you want to avoid the cumbersome FBT system, you might want to buy or lease your company car in your own name. Your company might even reimburse you for your business use”, says Drum.

The icing on the cake with buying is that you can claim an immediate tax deduction for the business portion of a new or used company car that costs less than $20,000. There are plenty of new small cars - and even luxury second-hand ones - available in this price bracket and many car dealers offer zero or very low interest car finance. You also avoid the ongoing paperwork that is involved in leasing a car. 

That noted, be aware the ATO keeps a close eye on tax deductions for cars. Make sure to get your accountant to run the numbers before making a decision on how to finance your new company car. 

Is it better to buy or lease in bulk? 

The scales tip in favour of leasing if you have a larger business that needs a fleet of company cars. This is especially the case if you want your employees to be seen in late-model cars but don’t want to tie up lots of working capital buying those cars or deal with the hassle of maintaining a fleet of vehicles. If you’re in this position, consider appointing a specialist leasing manager who has the buying power to negotiate fleet discounts. They can also look after maintenance and arrange appropriate insurance.

Whether you buy or lease, and whether your business needs one car or 100, make sure to talk to your Steadfast broker about what car insurance you may require.

 
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