Written by An operating lease is, as the name suggests, a type of lease designed to help businesses gain access to commercial assets like vehicles. Here’s a quick breakdown of how these leases work:
- Your leasing company purchases the vehicle on your behalf
- You select the term over which you want to lease your vehicle (between one and five years)
- You set your car’s kilometre limit under your leasing agreement
- Your vehicle’s running costs, including insurance, registration and maintenance, can be included in your payments (fully-maintained) or organised by you (non-maintained)
- Your business is given access to the vehicle and you’ll start making payments with interest and fees
- Once your term has concluded, you’ll hand back the vehicle to the leasing company
As you can see, the risk of obsolescence falls to the leasing company, not your business. There’s no residual payment to speak of at the end of the term, meaning you won’t have the option to buy or sell the vehicle.
What can I use an operating lease for?
As mentioned, operating leases are most commonly used for road vehicles, rather than other specialised commercial assets like equipment. Some of the vehicles you may be able to lease for your business include:
- Cars
- Trucks
- Vans
- Utes
- Motorcycles
- Buses
How are operating leases different from finance leases?
There are plenty of differences between operating and finance leases, which are another option for businesses looking to lease instead of buy. Let’s take a look at how they’re different:
| Operating lease | Finance lease | |
|---|---|---|
| Ownership? | Rests with the lessor at all times | Rests with the lessor until residual is paid, then transferred to the lessee |
| Term length? | One to five years | One to five years |
| Residual payment? | No | Yes – in line with ATO minimum requirement |
| Options at the end of the lease? | Return the vehicle to the lessor | 1. Pay the residual and buy the car 2. Sell or trade in the car to cover the residual 3. Refinance the residual and extend the lease |
| On-road costs included? | Optional | Optional |
| Cost of payments? | Higher (with on-road costs included) | Lower (with on-road costs included) |
| Tax-deductible repayments? | Yes (subject to asset usage) | Yes (subject to asset usage) |
Can I claim my operating lease payments on tax?
Your operating lease payments are tax-deductible, with up to 100% able to be claimed as a business expense. However, it’s important to note that how much you’re able to claim depends on your usage of the vehicle.
A lease for a fleet of trucks that aren’t used for anything other than hauling freight to and from your business premises could, in theory, have 100% of its payments claimed. However, if you’re a small business owner and use your leased car around 20% of the time for personal purposes, you’d only be able to claim approximately 80% of your payments.
If you’re unsure what you can and can’t claim as a business expense, it’s worth speaking with your accountant or another tax professional to get a definitive answer before you submit your tax return.
What’s the difference between an operating lease and a novated lease?
A novated lease is an alternative, non-commercial leasing option available to employees. Under this arrangement, your employer leases a vehicle on your behalf and gives you access to it, taking the lease payments out of your pre-tax salary.
The major benefits of this structure are tax-related: reducing your pre-tax salary means you’re liable to pay less income tax, while GST can be claimed on the purchase and passed onto you as savings.
The vehicle can be used however you like, with no restriction on business usage, but it does come with a residual that you’ll need to pay at the end of the term and will have the same options as a finance lease.
While this product is designed for employees, it can also be taken out by self-employed individuals who pay themselves a salary. You can speak with Savvy about your available options before you sign off on your lease.
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Frequently asked leasing questions
What costs are included in a fully-maintained lease?
Different companies will have different inclusions when it comes to their operating lease packages. Some of the expenses that can be included are:
- Comprehensive insurance
- Vehicle registration
- Servicing and maintenance
- Roadside assistance
- Tyre replacement
- Fuel
Can I extend my lease term?
Yes – some lenders will allow you to extend the term of your operating lease. This is an option you may have on a finance lease, but only if you refinance the residual. Because this isn’t an option here, you’ll have to negotiate an extension of the agreement with your lessor in order to do this.
How is leasing a vehicle different from buying one?
Buying a vehicle means you automatically own it from the outset and are responsible for maintaining it and organising all the key on-road costs yourself. However, because you own the vehicle, it’s fully in your control, meaning you can run and modify it however you like.
If you wanted to finance its purchase, you’d generally opt for a chattel mortgage, which would enable you to claim the portions of its interest, GST and depreciation equivalent to its business usage.
How much will my operating lease cost?
The cost of your lease will depend on a variety of factors, such as:
- The vehicle you choose to lease
- The length of your leasing agreement
- The interest and fees charged by your lessor
- Whether you choose fully-maintained or non-maintained
- The costs included by your lessor if it’s fully-maintained
Am I able to buy the vehicle at the end of my lease anyway?
Yes – you may be able to negotiate the purchase of the car with your leasing company at the end of the agreement. However, there’s no obligation for either party to complete the sale, so it’ll come down to what you can agree on.
What do lessor and lessee mean?
You might’ve seen these terms when discussing leasing arrangements. A lessor is the company that’s leasing out the vehicle, while the lessee is the business or individual paying for and using the leased vehicle.
