Is your current business vehicle looking a bit tired?
Are you unsure whether to lease or buy a replacement vehicle?
Here is what we consider when advising our clients what the best choice for them is.
WHAT SHOULD YOU CONSIDER WHEN COMPARING LEASE OR BUY OPTIONS?
Considering your business capabilities and your vision for the business answer these questions?
- What is more important asset ownership or low upfront costs?
- Do you really need a new vehicle now but lack funds for a deposit?
- Is paying off debt and maintaining low debt a priority for you even if it means higher payments now?
- Can your business carry a large extra expense if the vehicle requires extensive maintenance?
If asset ownership is a priority, you have the available funds, and you wish to pay off debt quickly buying a vehicle is a good option for you. However, if you need low upfront costs as you do not have the funds for a deposit leasing is the better option as long as you have good cash flow. In addition, if you are willing to pay a higher monthly payment you can avoid any surprise extra maintenance costs.
BUYING A VEHICLE
If you buy a vehicle for your business you must pay all the on-road costs plus associated interest and/or finance charges. For most small businesses a hire purchase agreement is done and the first payment is due one month after signing the contract.
Once you have paid for the vehicle in full your business then owns the asset which can be used as equity if you wish to upgrade the vehicle, but if you sell the vehicle before the payments are complete you are still liable to pay the outstanding amount.
As it is an asset it will depreciate in value according to the set IRD rates, this is generally 30% DV (diminishing value). The depreciation value can be obtained with the calculator on the IRD website – IRD Depreciation Calculator
NB: There can be confusion over the difference between a lease and hire purchase agreement; essentially they are two different ways of financing a vehicle
- Leasing is when a person uses but does not own a vehicle and may or may not purchase it at the end of the lease.
- Hire purchase is when at the end of the payments the vehicle is acquired by the business/person.
LEASING A VEHICLE
There are two types of lease:
Operating lease
- A contract to use a vehicle for a fixed period, up to 46 months
- At the end of the lease period, you hand the car back.
- Assuming mileage is within the range set out in the contract there will be no further payments required from the lessee (you).
- The arrangement can either include full maintenance or not. A full maintenance option could mean significantly higher monthly payments.
Finance lease
- Also a contract to use a vehicle for a fixed period, except that a finance lease also accounts for the likely value of the car at end of the lease period (the “residual value”) after depreciation.
- A finance lease with a residual value tends to have a lower monthly payment than an operating lease.
- The lessee can also usually buy the vehicle for the residual value at the end of the lease period.
- If the lessee’s vehicle use is greater than the agreed maximum use there is a chance the vehicle will be worth less than its predicted residual value. This will usually trigger an extra cost.
When you lease you have the option of not paying a deposit and monthly payments are fully claimable as an expense. You make your first payment at the time you sign the lease, and monthly thereafter. If your business has good cash flow but cannot produce a large deposit up front this is a good method or acquiring a new vehicle.
NB: Leases involve complex tax requirements under the Financial Arrangement rules and GST requirements for installments this is most often a task for us, the tax experts.
WHAT IS THE BEST CHOICE?
This is really situational to your unique business and vision, consider the questions above and if an investment in a new vehicle will create a return you desire. You can talk to us about whether this is a good decision for your business as we are available to you whenever you need us.
Kelvin Scoble