Should I Buy or Lease a Business Car in Australia?
Should I Buy or Lease a Business Car in Australia?
There is no straightforward answer. No size fits all. It depends on your circumstances. Consider these 10 points in your decision to lease or buy your car.
1 – Car Limit
2 – Instant Asset Write Off
3 – Cash Flow
4 – Interest Rates
5 – Deposit
6 – Credit Rating
7 – Ownership
8 – Costs
9 – Cash Management
10 – Preference
There are different types of car leases, but we assume here that you are offered an operating lease since that is the most common type of lease for small to medium businesses in Australia.
1 – Car Limit
Is the purchase price for your new car above or below the car limit? In 2024 the car limit is AUD 68,108. This car limit applies to all, so it doesn’t matter whether you are a sole trader, partnership, company or trust or a combination of those. If you buy the car, you can only claim GST and depreciation up to the car limit. If you lease, you can tax-deduct all lease payments and claim all GST irrespective of the car limit (unless it is a hire purchase). So if the purchase price is above the car limit, that is a tick for leasing.
2 – Instant Asset Write Off
Is the purchase price above or below the threshold for the instant asset write-off? In 2024 the threshold is AUD 20,000 (Thank you, Albo.)
Below the threshold, you get to write off the car in one go. So that is a tick for buying. But anything more and you have to pool or depreciate the car over 8 years. So you pay the money now but only get a tax deduction slowly in little drapes and drops year by year. Not great.
But when you lease, you get a tax deduction for every cent you pay. So under AUD 20,000, give buying a tick. Over AUD 20,000, give leasing a tick.
3 – Cash Flow
Monthly lease payments are usually lower than monthly repayments. Yes, insurance premiums are higher for a leased car, but that difference is usually not as big. So if cash flow is an issue, give leasing a tick.
4 – Opportunity Costs
Even if you don’t need a loan, consider the opportunity costs of spending the money on a car. If you could make more money investing the money into something else than buying a car, then that is a tick for leasing.
5 – Deposit
To buy a car – even if you take out a car loan – you need a deposit. If that is an issue, give leasing a tick.
6 – Credit Rating
It is easier to qualify for a leasing contract than a car loan. So if your credit rating is not that flash right now, give leasing a tick.
7 – Ownership
If you buy the car, it is yours. If that is a problem – for example when facing insolvency, bankruptcy or divorce – then give leasing a tick.
8 – Costs
When you count every single cent you will spend on your car (less the money you get back when you sell), all up you will pay more for a lease than if you buy the car. And that is usually true even when you have to take out a loan to buy the car and hence add the total interest to the cost of the car. So if you want to pay the least amount possible all up, give buying a tick.
9 – Cash Management
Leasing requires self-discipline. It means you must be able to put money aside in a good month to cover the leasing rates in a bad month.
If that isn’t you, then that is a tick for buying.
10 – Personal Preference
Leasing is like renting. You pay for the right to use somebody else’s assets. If that isn’t you and you rather own than rent, that is a tick for buying.
Decision Time
Some of the above is about doing the maths – comparing the total cost of leasing to the total cost of buying. But a lot of it is about you. And that is why there is no clear-cut answer that will apply to everybody.
It all depends on where you and your business are at. And that is why you should speak with your accountant before you make the decision whether to buy or lease.
