A car lease is a finance product that allows businesses and individuals to use a car without owning it. Instead, the financier buys the vehicle and leases it to your business for a set term. There are three main types of car leases in Australia:

Finance lease: Also known as a non-maintained lease, a finance lease is a type of lease agreement where the business leases the asset from the financier over an agreed term. At the end of the lease, the business pays the residual value to secure the asset. These leases are typically cheaper than operating leases, as payments only include lease costs rather than other maintenance and running costs.

Operating lease: An operating lease, also known as a fully-maintained lease, is essentially a long-term rental agreement taken out by a business for assets such as vehicles or equipment. At the end of the term, the business returns the asset – unlike other lease types, there is no option to buy. This type of lease is a suitable option when temporary access is needed and ownership isn't the primary goal.

Novated lease: A novated lease is a car financing option for employees that allows them to salary package a car through their employer. Lease payments are deducted from the employee’s pre-tax salary, potentially lowering their overall tax bill. The leased car is the employee’s to use for personal purposes during the lease term, and at the end there is the option to pay the residual and own the car outright.

The differences between vehicle lease types

How do residual values work for car leases?

A residual value is its estimated value at the end of your leasing term. This value is set as a required payment to complete your finance or novated lease term, meaning you’ll have to pay it in some form at the end of the agreement.

All residual values must abide by the minimums set by the Australian Tax Office (ATO), which are as follows:

What happens at the end of a car lease?

There are several options you can choose from at the end of your car lease when it comes to dealing with the residual. These are:

• Pay the residual out of pocket and purchase the vehicle to end your lease
• Sell or trade in the car, using the proceeds to pay the residual, and end your lease
• Sell or trade in the car, using the proceeds to pay the residual, and start a new lease with a different car
• Refinance the residual and extend your current lease with the same car
• Hand back the car to your leasing company (operating lease only)

Can I claim tax deductions on a car lease?

Yes – in Australia, you can claim tax deductions for car expenses equivalent to the total proportion of business usage of the vehicle. For instance, if you use the car for business purposes 75% of the time, you can claim 75% of all eligible expenses.

The entire lease payment is tax-deductible (up to your total business usage), with some of the expenses that can be claimed including:

• Repairs and servicing
• Fuel
• Insurance premiums
• Registration
• Depreciation

You may also be eligible to claim goods and services tax (GST) credits for your instalments and residual if they included (and if you’re registered for) GST. If you have taken out a finance lease and are registered for GST, you can claim back some or all of the GST included in your lease payments as an input credit on your next Business Activity Statement (BAS). This means you can effectively reduce your GST liabilities, saving you more money.

This information only serves as a guide, so speak to your accountant or a tax professional for more information specific to your situation.

What are the tax benefits of a novated lease?

If you get your car under a novated lease or as part of a salary packaging agreements, your payments are deducted from your pre-tax salary, allowing you to save on your income tax. This is the biggest benefit of taking out a novated lease.

The GST on the vehicle purchase can also be claimed by your leasing company, which can be passed down as savings to you. You may also be able to claim for additional expenses associated with using the car for work, such as parking, but you cannot claim tax deductions for running costs like you would with an operating or finance lease.

How much does it cost to lease a car?

Much like a car loan, how much you’ll pay to lease a car depends on several factors, including:

• Car price: generally, the higher the price of the car, the higher your monthly lease payments will be. However, remember that you aren’t financing the entire cost of the car when you lease; instead, you're paying for the depreciation of the vehicle over the lease term.
• Lease term: shorter lease terms often result in higher monthly payments, but you’ll generally pay more interest with a longer lease term even though your monthly costs are lower.
• Interest rate: higher interest rates on a car lease translate directly to higher monthly payments and higher costs overall.
• Residual value: a higher residual value translates to lower lease payments because the lessor (financing company) anticipates recouping more of the car's value when you return it. However, it also means you’ll pay more in interest overall.
• Type of lease: the type of lease you have will affect how much you pay. For example, fully-maintained lease payments are typically more expensive than non-maintained ones, as all the on-road costs are included in the payment.
• Distance driven: the higher the number of kilometres you drive each year, the more you’ll pay for your lease. For instance, drivers who list 10,000km or less per year as their total travel time will likely save compared to those closer to 40,000km.

What are some alternatives to car leases?

Whether you are a business owner or an employee, there are a number of ways to get a car for work. Other than car leases, you may want to consider:

• Chattel mortgage: a chattel mortgage is a type of secured loan for the purchase of assets such as cars primarily for business use. Under this arrangement, the asset is used as security for the loan and the borrower makes regular payments over time. Unlike a lease agreement, you own the asset from the start, giving you greater control over how the car or equipment is used or modified.
• Hire purchase agreement: a hire purchase agreement is a type of financing arrangement where an asset is hired for a fixed period, typically with the option to purchase the asset at the end. During the hire period, the borrower makes regular payments to the lender, which typically include interest and a portion of the principal amount. Once all payments are made, ownership of the asset is transferred to the borrower.
• Secured car loan: a secured car loan is a popular way to finance a car purchase. In this arrangement, the borrower borrows money to buy a car and the vehicle is used as collateral. If the borrower fails to repay the loan according to the agreed terms, the lender has the right to repossess the car to recover their losses. Because the loan is secured by the vehicle, lenders typically offer lower interest rates than unsecured loans.
• Low doc car loan: a low doc vehicle loan offers a solution for individuals and businesses that lack the necessary paperwork to buy a car or equipment. It is suitable for applicants such as self-employed individuals and sole traders who can’t provide their last two years’ worth of completed tax returns. This type of lease can also work well if you’re upscaling and need to invest in vehicles or equipment to grow your business.