Trying to decide between purchasing a new car, or instead leasing it, is not always a straightforward decision. After all, there are so many variables at play, influenced by one’s personal circumstances, that it can be quite the dilemma. Not to mention, each strategy has benefits and drawbacks. One of these benefits for novated leases is related to tax advantages. So when it comes to business use, just what are the tax benefits of leasing a car?
We’ve covered novated leases previously in some detail, but to help aid your understanding, if it’s the first time you are hearing about them, then here is a quick rundown. A three-way contract is drawn up to cover your obligations, the financier’s obligations, and your employer’s obligations. Your employer makes payments on the car in your name, from your income, however you borrow and have access to the car from the financier.
Tax benefits while leasing a car
It’s important to understand the step by step process when it comes to paying the lease, as the premise of this arrangement is what underpins the benefits. First, take note that under a normal car loan, you would be paying it back after tax has been deducted from your income. With a lease however, the payment is made by your employer to the financier before your salary is taxed. As such, you reduce your taxable income and retain a higher net salary.
In most occasions it won’t be necessary to make extensive repairs on a vehicle that is under lease since it can be returned or traded in. If you are required to do so however, these payments can again be made before tax has been deducted from your salary. You can also add running costs into the fold as well, with things like maintenance and petrol also eligible for the same treatment.
So with these benefits, why would anyone buy a car?
Just as leased cars offer distinct tax benefits to their user, so too do cars that are bought outright for business use. On the one hand, the GST component from a car purchase can be claimed in the first business activity statement (BAS) you submit after it has been acquired.
Beyond that, it’s also worth considering the accounting treatment for depreciation, particularly with the government’s instant tax write-off initiative. A deduction can only be made for this aspect if the vehicle has been bought, as opposed to being leased.
The final decision will ultimately be a personal one, and you will be wise to take into account your financial position, employment stability and your overall intentions with the vehicle in question.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.