To buy or lease?

13-08-2007 | Gerard Hall

Buying or leasing a new vehicle is an expensive exercise and the numbers should be crunched before a decision is made.

Brown Glassford & Co's Haydn Randall says leasing can be a good option if you always want to drive a vehicle which is less than three-years-old.

The Christchurch farm accountant recommends careful consideration before deciding whether to buy or lease new vehicles.

Variable costs that need to be taken into account include the vehicles residual value, its worth at the end of the term and the actual cost of the funds involved in each of the options.

Potentially it may also be cheaper to hold onto a vehicle longer, or buy a second hand vehicle and avoid the effects of new vehicle depreciation.

While Randall says there are exceptions, usually the repairs and maintenance of an older vehicle would be cheaper than the variable costs associated with leasing or purchasing new.

It is also important to look at the potential effect the actual costs may have on the business's cash flows, profit and any taxation implications.

Randall says unlike a finance lease, with an operating lease the vehicle's ownership never passes to the lessee. The maximum period for an operating lease is 45 months. All operating lease payments are treated as a 100% tax deductible business expense and the GST component of each lease installment claimed.

Operating leases are also locked in, whereas a straight purchase which has no set period may be a more flexible option.

Vehicle leases are deemed to be finance leases if the intention is that the vehicle's ownership transfers to the lessee at the end of the lease agreement, the lease term is more than 75% of the asset's useful life and the lease includes an option to acquire the asset at the end of the term for less than its market value.

Finance leases also include those with a balloon payment and hire purchase agreements with a deposit paid up front and ownership at the end of the agreement.

A balloon payment is based on the estimate of the vehicle's worth, its residual value. The payment is made at the end of the agreement to complete the purchase.

However, the vehicle could be sold back to the dealer and the proceeds used to pay the balloon payment. Residual values can be guaranteed or not guaranteed.

Regardless of whether it is a tractor, motorbike, 4WD farm ute or a family car, Randall says finance leases are treated in the same manner as loans. This means the lessee is deemed to be the owner of the asset.

As a result, instead of claiming the actual lease payments as deductible business expense, the lessee is only able to claim the interest component and the allowable IRD approved annual depreciation. The GST on the vehicle is claimable at the time of purchase.

Randall believes the impact of Fringe Benefit Tax (FBT) can often be overlooked when making decisions relating to vehicle purchases and their use.

FBT is levied on the value of any non-cash benefits paid to employees and shareholder employees and includes vehicles. The amounts can sometimes be substantial and add significantly to vehicle running costs.

Regardless of whether the vehicle is owned or leased, FBT is paid on the vehicle's GST inclusive market value.

The FBT payable each year on a vehicle with a market value of $45,000 potentially amounts to $6912, ($45,000 x 24% x 64%).

A 4WD farm vehicle is classified as ‘work related' and exempt from FBT, Randall says.

However, it would to be difficult to argue that a family vehicle such as Mitsubishi Pajero or Subaru Legacy should be 100% exempt.

The FBT regime does not apply to sole traders or partnerships. Where the vehicle is owned by a sole trader or partnership and the percentage of its business related use can be proved, (such as the use of a log book), the business claims that percentage of the vehicle's related expenses.

If the same vehicle is owned by company, as is becoming more common in farming, the basis for calculating the amount of FBT payable is determined by the availability of the vehicle for private use, not the actual private use as shown by a log book.

The company would claim 100% of the vehicle costs but pay FBT on the days the vehicle is available for private use. In effect this could require FBT to be paid for all 365 days of the year.

To avoid this potentially hefty imposition of FBT, Randall says it may be more tax efficient, especially within in a company-owned structure for farmers to consider keeping the ownership of their private cars outside the business structure.

Instead he suggests the company reimburse the vehicle owner using Public Service Mileage rates for the number of business related kilometres.

The reimbursement allowance becomes virtually tax free to the vehicle owner. It is also a deductible expense to the business.

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