Car Leasing and Taxation Benefits Considered
Car Loans > Car Loan Articles > Article: Car Leasing and Taxation Benefits ConsideredWhat is a Car Lease?
A car lease (sometimes called a finance lease) is a finance product that allows customers to use a motor vehicle and benefit as an owner, while the lender actually retains ownership of the vehicle. The leasing company purchases a vehicle on behalf of their customer (the lessee) who then pays the leasing company a fixed monthly rate to rent the vehicle until the lease has expired. At the end of the lease, the customer can choose to pay a final installment on the lease and take ownership of the car (called the residual value), trade in the vehicle for a new lease, or refinance the residual and continue to lease the same vehicle.
There are two types of leases:
- Closed Lease
A closed-end lease (also called a 'walk-away' lease) is the most common lease type. A closed end lease allows the lessee to return the vehicle once the lease period has expired. The lessee has no responsibility to the vehicle unless they need to pay for repairs of excessive damage or overages on their mileage.
In a closed ended lease, the numbers are based on predictability. Leasers believe that:
- Most drivers go no further than 12,000 miles per year
- The vehicle will not be driven in rough conditions or abused in any way
- The end value of the car is predictable
At the beginning of the lease, the leasing company estimates the value of the vehicle based on the predicted number of miles driven. If the vehicle is worth less than the estimate when the vehicle is returned, the leasing company loses the money, not the lessee. However, if the vehicle is returned and it is worth more than the prediction, the lessee has the option to buy the vehicle. The lessee can then continue driving the car or sell the vehicle and make a profit.
- Open Lease
An open-end lease is usually provided for commercial businesses that are leasing vehicles. In an open-end lease, the lessee (customer and vehicle operator) takes all of the financial risk associated with the vehicle. However, because this type of lease is normally given to a business, the expense can be written off and is not usually a problem. Mileage given on a business lease is less predictable and much higher than that of a closed lease.
At the end of the leasing period, the company who leased the vehicle is responsible fo paying any difference between the estimated lease-end value and the actual value of the car.
What are the benefits of leasing a car?
Money
Because lessees are only required to pay for the time that they actually use the vehicle, monthly payments are typically 30-60% lower than they would be for a purchase loan for the same car (and same term). Since the monthly payments are lower, the lessee is receiving more car for the same amount of money and can drive a new vehicle every few years (depending on the term length of the lease).
Most leases require a very small down payment (if any). This saves the lessee money. However, some lessees like to make a down payment so that they can lower their monthly payment amount.
Taxes
GST is applied on the monthly lease and to the end of the lease (the residual value of the vehicle). Customers can claim some (or all) of the GST from the rental and the residual value as an input credit on their next BAS (business activity statement).
If the amount financed is below the depreciation limit (the maximum asset value allowed by the Australian Tax Office when depreciating a motor vehicle), the customer claims the lease as a tax deduction.
If the amount financed is above the depreciation limit, interest charges on the lease and depreciation (up to the value of the depreciation limit) can be claimed.
Maintenance
Many people who lease vehicles regularly like to lease the vehicle for an amount of time that corresponds with the manufacturer's warranty coverage. In doing this, if anything goes wrong with the vehicle, the repairs are covered by the manufacturer.
No Selling Hassle
With leasing, the headaches of selling a used car are eliminated. When the lease expires, the lessee turns the car back to the leasing company and walks away. They have the option to buy or trade, but are not required to sell the car.
Should I lease?
Before jumping into a contract with a leasing company, ask yourself these questions:
- Will I want to end my lease early?
- Do I drive more than 15,000 miles a year?
- Will I want to customize my car with a paint job or modify parts?
- Do I abuse my vehicles or neglect maintenance?
If you answer 'yes' to any of the questions, be wary. Leasing may not be right for you. Leasing could cause you unhappiness or unnecessary financial pain.
What to do next
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