Thinking of buying a vehicle for your business? Before you jump right in, it’s worth investing some time into looking at how best to pay for it. After all, buying a car is an important decision that affects your life (and your business) for years to come.
Often vehicles for a small business are one of the largest assets the company will own, so purchasing shouldn’t be taken lightly. It doesn’t help that there can often be a lot of ambiguity around purchasing business vehicles either. Business owners frequently ask us:
Shall I lease or shall I buy?
Can I save tax, if I buy a new vehicle?
What Do You Need the Vehicle For?
Firstly let’s start with the brass tacks - what do you actually need the vehicle for?
Is this vehicle to be a business workhorse? A business marketing and sales asset?
OR dare we say it…(okay we will because we ask the hard questions sometimes!) is it your “dream” vehicle where FOMO might be getting the better of you?
If the former then proceed to the next questions and if the latter, then please don’t be fooled into thinking, ‘I can have my dream car because I can pay it off’. Leasing and loaning are both long term commitments and when business sales get tough you still have to manage this expenditure often as the business owner personally so we recommend you think twice before jumping into this - however much you want the dream car. Cash or Finance?
Now we’ve established that you're not just buying your “dream” car and that it is a sensible asset for your business. The next step is to decide whether you want to pay in cash or finance. Whilst on occasion we may recommend paying cash, cash is ultimately king and often better in your own business pocket than in the pocket of others. Your bank balance might be healthy now but we can’t predict the future and when you might need it. It’s easier to borrow for the car than for tax so make sure you have talked with us and we can ensure you are making the best decision for your business and personal circumstances with a view to the future.
Loan or Lease?
Whether you want to loan or lease depends on your needs. In the short term leasing a vehicle can be cheaper as you’ll often be paying less back a month than if you were buying it. You also don’t have to find a purchaser for it at the end of the contract. And as a business owner there are different tax treatments. If leasing you can claim the lease payments as a deduction as you pay, however if you take a loan for the vehicle you claim the GST up front and you can claim depreciation annually.
However you have to remember that yes interest rates are very similar to vehicle loans but the difference is in about three years you’ll be returning the leased car with nothing to show for it, unless you choose to pay extra. Plus there can be extra fees throughout such as going over the kilometres agreed in the lease agreement. And the down payment that you put down for the leased car? You won’t get that back at the end either. Ouch.
Whereas when you finance a car, yes it is initially more expensive but once you’ve paid off the loan it’s all yours. You can keep it for as long as you want, drive it as far as you want, decide to get it repaired or not if you get a dent, there’s much more freedom.
What Benefits Are There?
If the vehicle is solely for business purposes then you can potentially claim the full running costs of your vehicle as a business expense. When you start to use it for private use as well (such as your trip home from work) you’ll then have to keep a logbook to show the percentage of the vehicle’s use that is work-related.
Along with being able to expense certain aspects of the vehicle as a business owner there are some potential tax benefits such as being exempt from fringe benefit tax - however only certain work-related vehicles are exempt. If you do have to pay FBT the amount you pay depends on how much the vehicle has cost.
Want to learn more about financing your business vehicle and the benefits you might be entitled to? Speak to us. Give us a call on 07 578 5416