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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:
| Operating lease | Finance lease | Novated lease | |
|---|---|---|---|
|
Ownership |
Lessor retains ownership throughout lease term |
Lessor retains ownership until end of term |
Lessor owns vehicle, employer facilitates lease, employee has possession |
|
Option to buy |
No option to buy at end of lease term |
Option to buy at end of lease term |
Option to buy at end of lease term |
|
Term length |
1–5 years |
1–5 years |
1–5 years |
|
On-road costs |
Typically included in lease agreement |
Lessee responsible for on-road costs |
Responsibility varies, can be included in lease agreement |
|
Payment |
Fixed payments covering lease period |
Fixed payments covering lease period |
Payments deducted from pre-tax income |
|
Mileage limits |
Yes, many leases set a maximum number of kilometres per year |
Yes, many leases set a maximum number of kilometres per year |
No |
|
Balloon payment (residual value) |
No |
Yes |
Yes |
|
Risk of obsolescence |
Lessor |
Lessee |
Lessee |
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:
| Lease term | Residual value |
|---|---|
|
12 months |
65.63% of vehicle's purchase price |
|
24 months |
56.25% |
|
36 months |
46.88% |
|
48 months |
37.5% |
|
60 months |
28.13% |
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:
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:
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.
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.
Much like a car loan, how much you’ll pay to lease a car depends on several factors, including:
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:
Whether you’re a business owner or an employee, there are a number of ways to get a car for work. Other than car leases, you may also consider:
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Vehicle leasing is a way of gaining use of any car or vehicle you choose. It’s an option for finance that can be applied to any vehicle out there, no matter what the value or type. Larger luxury cars, trucks, SUVs, sedans and hatchbacks are all available with a lease. You can choose the specification of the vehicle before you order it, selecting options and features in the same way as you would if you were buying a car.
One of the many reasons so many Aussies opt to lease a car is that repayment terms are so flexible. You can choose the length of the agreement to match your budget, and adjust payment amounts further by including a lower or higher residual payment. Using a deposit is also a great way of reducing the amount you regularly pay. Tax benefits often outweigh a lot of the cost of leasing a vehicle too.
Different car leases offer various allowances for kilometre usage. For example, with a fully-maintained car lease, part of the cost of your deal is defined by how many kilometres you’ll travel. That’s because it affects the resale value of the vehicle at the end of the agreement.
Guaranteed Asset Protection or gap insurance provides peace of mind if you’re leasing a vehicle or you’re buying a car, van, or a truck using a different form of finance. Gap insurance is a way of protecting you or your business from financial loss if you have an accident and the vehicle gets written off. When that happens, there’s usually a ‘gap’ between the amount you still owe and the listed price of the car. Gap insurance covers that amount.
With a car lease, the lender owns the car you drive, this structure allows the lender to claim back the GST within the purchase price of the car.
This results in your monthly car lease payment being calculated on the purchase price of the car excluding GST which delivers a cheaper monthly repayment compared to other loan options. This is another large benefit of a car lease option.
Car leases typically run for periods between one and five years, and sometimes even longer. Different lenders offer various terms, so it’s important to check the provider you’re considering caters for your specific needs.
A residual value or payment is due at the end of a car lease or loan. You can reduce your monthly repayments by using one.
That depends on what type of lease you take out. Fully-maintained car leases include servicing, registration and insurance. Some car leases, however, require you to be responsible for maintenance, rego and keeping the vehicle insured – usually with a fully-comprehensive policy.
If at the end of the lease you would like to keep the car, you will need to pay out the residual amount. If you don't want to keep the car, you can start a new lease by paying out the residual via a trade in.
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