Leasing vs Purchasing: Which is the right option for you?

This question represents a common conundrum for both individuals and businesses. Most commonly associated with property and cars, leasing is also a great way to acquire lifestyle items or business machinery and tools.

While purchasing outright and owning an asset is an attractive option for many, oftentimes a well-structured lease can be a better option and will assist in maximising your financial position.

When we think about leasing we typically think of cars. Cars lend themselves to being leased as finance is relative easy, they depreciate in line with lease structures, business use deductibility is easy to prove and they can be structured so your employer pays with pretax dollars (Novated Lease).

Real Life Case Study

Recently, we were notified by a client that they were looking at entering into a lease agreement and had received a quote.

The quote from the lender included the following terms:

RATE:	4.75%
TERM:	60 months (with option to extend)
RESIDUAL:	$56,260
MONTHLY REPAYMENTS:	$3,173
AMOUNT FINANCED:	$200,000
FACILITY:	Novated Lease

On the face of it, 4.75% looked like a sharp and competitive offer. However, we believe that when it comes to your finances it is always prudent to double check the market.

We reverse engineered the monthly repayment and calculated the ACTUAL rate at 7.15%. We also discovered that over $15,000 of brokerage fees were added to the purchase price. This equated to $18,000 of additional costs over the five year term!

So, we looked around and identified a lease option that carried an authentic real rate of 4.20%, without the built in brokerage.

The services we were able to provide this client included:

Double checking finance costs and crunching the numbers to ensure best in market options were presented
Flat fee structure for engaging Financial Decisions
Advice on ownership
Advice on lease type
Advice on lease structure
Easily obtained finance

Unfortunately, this is not an isolated case for our clients. There are a myriad of pitfalls and traps in the financial world and this case study highlights the advantage of having a full service financial services firm working with your best interests in mind.

The next time you are thinking about purchasing or leasing a car, truck or machinery, make sure you run it past your Financial Decisions adviser. We consider ALL the financial implications and always endeavour to improve the health of your wealth!

The menu of leasing options

When considering a lease, it is important to note that you do not need to take on a “one size fits all” commitment. Different circumstances and different items might necessitate different approaches.

As such, there is a diverse range of lease agreements and understanding a little about the options can pay big dividends in the long run. By way of example, each of the following types of agreements are described using a car as the desired item to help put you in the driver’s seat with your finances.

Finance Lease

A common loan type for vehicles used for business purposes
The financier purchases the car and rents it to the borrower
Rental payments can be fully deductible
Generally, this type of lease includes a fixed monthly lease payment and a residual amount payable at the end of the term
The borrower typically selects the car they want at a dealership and negotiates a price in the conventional way
This finance agreement is structured with the financier identified as the purchaser
At the end of the lease the car is given back to the financier and rental payments cease.

Commercial Hire Purchase

As per Finance Leases, this option involves the finance company purchasing the vehicle on behalf of the customer
Use and possession of the car is provided in exchange for regular payments, the regularity of which can generally be negotiated with the financier
Upon final payment, including any residual amount, the lessee officially takes ownership of the car
Alternatively, the customer is able to trade in the vehicle, or re-finance the residual value
A balloon or lump sum payment is typically required at the end of the lease term to remove financier interest and charge over vehicle.

Chattel Mortgage

Under this type of lease, a financier lends money to the customer to facilitate the purchase of the car
The lessee takes ownership of the vehicle at the time of purchase, however the financier takes out a “mortgage” on the car by way of an ASIC registered Fixed and Floating Charge in order to provide security for the loan
Once the term of the loan is completed and residual value is accounted for, the financier officially hands over ownership of the car to the customer
As per Commercial Hire Purchase agreements, the customer can alternatively trade in the car or re-finance the residual value

Equipment Rental (Operating Lease)

This type of lease is structured in the same way as a Finance Lease
The fundamental difference is that the lessee is not obligated to pay the residual value at the end of the lease term
Instead, the car is returned to the financier at the end of the lease and the customer doesn’t have the burden of paying out or refinancing the residual

Novated Lease

This option is often a great way for salaried employees to purchase a new vehicle
In essence, it allows the finance to be paid using the pre-tax component of the customer’s salary
This optimises spending power as funds that would otherwise be lost as tax are utilised in the payment of the lease
As lease payments are made from pre-tax income, this option also helps reduce the customer’s taxable income
Generally a straight forward, three-way agreement between the customer, their employer and a financier
Set up is easy, the employer is not subject to significant administrative burden and furthermore, it can be packaged with a “fully maintained” option that takes the sting out of operating costs and any unexpected maintenance requirements
Both Commercial Hire Purchase and Chattel Mortgage leases can be novated.
If the employee leaves the employer, the lease commitments pass on to the ex employee.

Luxury Car Lease

The ATO defines luxury cars as those costing more than the luxury car tax (LCT) threshold
Currently, this equates to $75,526 for fuel-efficient or hybrid vehicles, and $65,094 for other vehicles
At present, the LCT rate is 33%
In general, a Finance Lease or Novated Lease is employed
The customer is able to claim interest and depreciation, however it should be noted that this is limited to the LCT threshold and not the actual cost of the car

Equipment Finance Quick Reference Guide

For additional clarity, check out the table below. The main differences between each of the lease types are provided but for more information and specifics in relation to your own circumstances, please contact your Financial Decisions adviser.

Always consider taxation issues

Rather than create a tax burden, leasing items can often represent an opportunity to offset tax or claim deductions.

Depending on the type of lease chosen and the way in which the item is used, eg. personal use versus income producing, you can often claim either the rental amount or the interest paid. Sometimes you can even claim depreciation of the asset – even though you don’t actually “own” it.

Benefit from our experience

If you are considering a lease or wondering whether to purchase outright, it’s a good idea to contact your Financial Decisions adviser to discover the direct tax implications and whether the lease option you are considering is right for you and your circumstances.

We’ve helped many clients identify the optimal lease agreement available and as a result have improved their bottom line.

The Generation Fund

This week, we launched the website for the Generation Fund.

On track to launch in mid-July, we believe the Fund is set to deliver strong after fee returns for its investors with its solid investment strategy, diversified portfolio and highly experienced investment committee.

Please call one of our advisers on 9997 4647 or visit the website for more information on the Generation Fund.

Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. June 2017

Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407

Exchange – June 2017