Luxury Car Lease
Leasing a luxury car can be a cost-efficient, tax-effective way to drive a better vehicle. Get the wheels in motion on your luxury car lease with Savvy today!
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Luxury car leases are the financing choice many Australians use when looking to obtain a prestige car. Car leases are a fixed-rate way for some employees, companies and self-employed individuals to combine tax benefits with driving a valuable vehicle.
Savvy helps Australians find their ideal form of finance because we deal with many of Australia’s top niche and wholesale car lease providers, offering a broad range of products. That means we can make market-informed, independent decisions about your best way forward, based solely on your circumstances, and then quickly connect you with the ideal lender. Get started with us today!
What are luxury car leases and how do they work?
A luxury car lease is, as the name suggests, a product that offers customers the ability to lease a prestige vehicle. These are available to businesses and self-employed individuals, as leased cars are required to be used at least 50% of the time for commercial purposes.
Luxury car leases generally run between two and five years. When the term ends, you can pay the residual amount and own the car, refinance the residual and keep driving or sell the vehicle and start another luxury car lease. This flexibility makes form of finance a great option if you like to drive the latest prestige models.
Luxury vehicle leases differ from car loans because you don’t own the vehicle during the finance term. Depending on several factors, such as your tax and employment status, cash flow and how often you plan to upgrade your car, there may be a few different luxury vehicle lease options to choose from.
What are the tax implications of leasing a luxury car?
Unlike with a car loan where only the interest portion is tax-deductible, a lease allows you to deduct up to the entire repayment. This means that, for some leases and lessees, the whole of the payments are classed as a business expense.
Your tax situation is probably the most significant influence on which luxury car lease is right for you – that’s why it’s essential to talk with an expert Savvy consultant about which providers and products best meet your aims.
What is Luxury Car Tax and how does it work?
Whenever you buy a car that’s classed by the ATO as a luxury model, a special car tax will already be included in the marked price. That tax is the Luxury Car Tax (LCT). LCT kicks in when a vehicle’s value reaches a certain level, and the extra cost can be significant. You’ll have to pay at a rate of 33% for every extra dollar above the applicable threshold.
There are a couple of different thresholds for LCT based on the fuel efficiency a vehicle achieves. You’ll need to factor LCT into your car lease budget if you’ve been looking at vehicles that are close to or above the LCT threshold. The ATO adjusts the limits for LCT each year. As of the 2023-24 financial year, the thresholds are as follows:
- $89,332 for all fuel-efficient vehicles, which are defined as having a combined fuel consumption of 7L/100km or lower (such as electric, hybrid and green vehicles)
- $76,950 for all other vehicles that don’t meet the ATO’s fuel-efficient classification
Can I use the residual amount to lessen luxury car lease payments?
Unlike other forms of vehicle finance, where you can adjust the residual or balloon amount to reduce or increase repayments, with a lease, the residual amount is governed by ATO depreciation rates. That’s because, if you don’t opt to buy a vehicle at the end of a luxury car lease term, lower payments during the agreement would see you gain an unfair tax advantage. The lessor might also lose out when they sell the car because the total of the repayments and the residual would add up to less than the vehicle’s value.
What about optional extras and the Luxury Car Tax rate?
LCT is applied to any custom modifications or upgrades once you’ve passed the threshold. The rate is currently 33% and it’s vital to take LCT into account when budgeting for any optional extras, because items like upgraded wheels, leather upholstery or a high-end sound system can add up pretty quickly on a luxury car. You should also keep an eye on things if you start adding extras when the purchase price is just below the threshold too.
- The thresholds for LCT cars are set according to the cost of a vehicle before LCT is added.
- Factors like customs duty and GST will be included in that assessment, but it excludes all other taxes and expenses.
- The LCT thresholds aren’t exceptionally high, and as soon as the value of a vehicle reaches the limit, every dollar extra of your purchase will attract a luxury tax rate of 33%.
What are the GST implications of leasing a luxury car?
Products, businesses, individuals and balance sheet requirements all vary, but leasing a car can often bring tax savings. For instance, when the financier buys a vehicle, they can claim GST back, and that saving is usually passed on to you. In the case of a $100,000 car, GST alone amounts to more than $9,000.
Your luxury car leasing and finance options
Products, businesses, individuals and balance sheet requirements all vary, but leasing a car can often bring tax savings. For instance, when the financier buys a vehicle, they can claim GST back, and that saving is usually passed on to you. In the case of a $100,000 car, GST alone amounts to more than $9,000.
A luxury vehicle finance lease is an agreement between yourself and a finance provider. They buy the vehicle on your behalf and rental payments are based on the vehicle’s value during the term, less a residual amount related to the buying price when the agreement ends. When that time arrives, you can choose to pay out the residual and take ownership of the vehicle, refinance it or sell the car to cover it and get another lease.
With a luxury car operating lease, payments are based on the car’s depreciation amount during the term, with the lessor taking on all ownership and disposal risks. Servicing, registration, maintenance and other on-road costs are included in the payments you make, so an operating lease is a fully maintained solution which works more like a long-term car rental.
Operating leases are ideal if you want all the benefits of a luxury car with little or no hassle. You just drive, and everything else is taken care of by your monthly payment. At the conclusion of the lease, you simply hand your car back to your leasing company.
A novated lease for luxury cars is a three-way arrangement between your employer, you and a salary packaging company. Not all employers offer novated leases, which are also known as salary sacrificed car agreements. You lease the vehicle using your pre-tax salary, so you can enjoy significant savings in terms of income tax. However, there are significant GST benefits with a novated lease too:
- Because the lease company buys the car and then claims back the GST on the whole purchase price, they can pass that saving on to you. On a $60,000 car, for example, that equates to an immediate reduction of more than $5,400. When you’re a private individual, there just isn’t any other way you can buy a car GST-free, but with a novated lease, you can.
- When you take on a fully maintained novated lease, servicing and maintenance are included in the cost of your regular payments and you can pay for some or all of that from your pre-tax wages too.
If you use your car for business purposes, a chattel mortgage could be a good finance lease alternative. That’s because, with a chattel mortgage, you own the car from the start of the finance agreement, unlike with a finance lease where the lease company owns the vehicle until you pay off the residual at the end of the term. That means the tax implications are different and might suit many business users:
- You can claim all GST on the purchase price back when you lodge your next Business Activity Statement.
- There is no GST on monthly repayments or when paying any residual amount at the end of your agreement.
- You can claim for the interest portion of your regular repayments as a business expense.
- You own the car from day one, so you can claim depreciation as per ATO guidelines.
- Any tax you claim has to be in proportion to the amount of business use your vehicle gets. For instance, if you use the car for business 50% of the time, you’ll need to account for that in terms of both depreciation and interest on payments.
- With a chattel mortgage, you have more flexibility with the residual value, which you don’t have with a lease.
- You also get the same options at the end of a chattel mortgage as with a finance lease – you can choose to pay off the residual and own the car outright, refinance the residual, or sell the vehicle and start again.
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