Q: I am a plumber running around in an ageing van which is in urgent need of replacement. I now own the vehicle, but wonder if I would be better off leasing a replacement van. What are the benefits of vehicle leasing over ownership?
A: There are several things to consider when deciding if you should lease a business vehicle. Ultimately, it's about minimising your cash outflow over the period that you have the replacement van.
Firstly, compare the cost of a new van with the payments that will be required under a lease. A lessor will be looking to make a profit, so the lease payments will include an interest element, although you may also have financing costs if purchasing.
Residual value is also a factor. Lessors make assumptions about value when setting the lease instalments as, at the end of a lease, generally you must return the vehicle. If you purchase, you will have an asset to sell or trade in later on.
Tax treatment differs, as only depreciation can be claimed on a purchased asset, as well as any interest. Lease payments are generally deductible, unless the lease is a finance lease (for example, where the term is for more than 75 per cent of the van's life or you have an option to purchase at below market value).
The goods and services tax (GST) treatment also differs. You will be able to claim GST upfront on the cost of a purchased van. Under a lease you generally claim GST on the instalments.
The accounting treatment may be a factor, as you may wish to keep the asset off the balance sheet. A purchased asset or finance lease may result in additional liabilities that affect lending ratios.
It isn't an easy decision to make. Although cash is a key aspect, it's also a choice about whether you want the risks and rewards of ownership.
- Geordie Hooft is a tax partner at Grant Thornton New Zealand.
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