The Leasing Logic

Today there is definite trend towards leasing thanks to the
benefits leased fleet can offer. The idea is simple Ñ think of your car as just another business tool and remind yourself that you don’t need to own it to enjoy it.
The main benefit of leasing vehicles is capital can be used more efficiently to expand or develop core business. If your company currently owns all its cars and needs cash injection to buy some new machinery, one option is to sell the same cars to leasing company and then lease them back. Payments on an operating lease can be claimed against tax and staff can avoid all the paperwork of buying, maintaining and finally selling the cars.
“In the last few years we have seen considerable growth in leasing cars in New Zealand,” says Grant Edwards from Nissan Finance. “This is hardly surprising when you realise that capital used for buying cars is non-income earning depreciating asset.”
Before deciding whether leasing is viable option for company, it is worth defining the term ?lease’ since there are three types of leasing available Ñ fully maintained operating lease; non-maintained operating lease, which carries residual risk at the end of the agreement; and finance lease, also known as lease to own. The latter means the client can make an offer to buy the car at the end of the lease period, having set up the deal from the beginning of the contract.
Leases usually run for three years Ñ this is the optimum for clients to get the rate down. Leases can also be arranged for 12, 24 or up to 48 months. Many organisations fall into the trap of using ?lease’ to describe not only how they fund the fleet, but also how they pay for range of services to run the fleet. They are two separate topics Ñ leasing (the funding of the fleet) and fleet management (all the ancillary services involved with running the fleet).
Customers can walk away with new or nearly new car every three years, knowing that all servicing and maintenance needs are covered. The range of cars on offer tends to be divided into those below and above 2-litres. Popular lease cars include the Falcon Commodore which costs about $700 month. The Holden Vectra is also popular as mid-size car. As rough guide, 1.6-litre vehicle costs between $350 and $500 month to lease; 2-litre car costs around $600 month; 3 to 4-litre car costs up to $800 month; and top-of-the range luxury car or 4WD costs around $1000 month.
As the demand for leasing picks up, so the nature of the market becomes increasingly competitive. Most lease companies specialise in customising packages to suit individual clients and offer range of unique products. flagship product from Lease Plan New Zealand is Open Calculation.
“It enables our clients to benefit from the savings we make in the running of the fleet. Each month we make reports listing the cars in fleet, indicating comparison of running costs incurred by Lease Plan against our clients’ budgets. There will be debit or credit depending on kilometres travelled. If the final balance shows saving against the total budget, it is paid to the client. If it is loss, it is absorbed by Lease Plan,” explains Charles Willmer, managing director from Lease Plan.
Obviously all this hassle-free help from leasing companies comes with hefty price tag. “But the cost of leasing need not be any more expensive than buying and it is certainly lot easier for professionals who are more interested in their job, than fixing car problems,” says Edwards. “As we are buying between 600-2000 vehicles month, we get fleet discounts which we can pass on to our customers. There is hidden item in leasing which is the start point. The buying price is usually lot lower than what most people could find. In effect, because of our considerable buying power, we can exert influence over the price we pay.”
When does it make financial sense to ignore the above and own car? “It depends on individual requirements but if company has no internal recognition of cost of funds and no targets for return of investment, then we find companies are less likely to look at leasing as financial tool,” says Willmer.
The changes in Fringe Benefit Tax (FBT) which took effect on April 1 are already having an impact on leasing. As tax rates for people earning more than $60,000 were increased from this date, FBT tax rates increased in parallel. business pays FBT based on the new price of car, when it was brought onto the books. The law takes no account of depreciation on cars.
“There has been general trend towards leasing in the last few years due to economies of scale, cash fleet discounts, and more money being made available for the business. The emphasis will start moving towards leasing on full service basis as clients fully identify what the cost of running car actually amounts to,” says Willmer. One obvious drawback for employees buying their own cars is that they cannot compete with scale economies of large leasing company.
Changes in FBT will encourage company accountants to make proper, informed decision whether to offer employees more cash (“grossing up” salaries to buy car), or car. The difference is whether the cost of car goes through the individual, or the company.
Willmer adds that the Inland Revenue has offered tiered system but thinks many people will choose to pay the maximum rate to avoid the high costs of calculation and compliance.
“When looking at the running costs of vehicle, you need to factor in FBT or PAYE. If company provides the car, FBT will be lower,” says Willmer. “Here is an illustration. If you take car with an annual cost of $15,000 to run the car, you will spend an extra $4000 on FBT, compared with $5000 on PAYE.” PAYE is added as income, while FBT is taxed as benefit.
To determine the actual cash value benefit is difficult. “The Government has declared 27 percent of GST value inclusive but that figure is arbitrary,” points out Willmer. “The cost of running car depends on many things like discounts, how much you use it, where you live and so on, so trying to equate what you pay on FBT with PAYE bears no relation.”
It seems fair to say that the grossing up of salaries for employees to buy cars will be detrimental to effective fleet management. Leasing companies don’t just provide the finance package at the beginning; they can also handle all those annoying jobs like registration, maintenance, tyre care, fuel cards, and providing replacement vehicles when things go wrong.
The increase in FBT raises other concerns that Lease Plan highlights: It creates an inequity in the tax base for employees earning less than $60,000 per annum. The cost of employment will increase for those employees receiving fringe benefits. This will affect all employees, not just those earning over $60,000. The additional FBT cost is inflationary.
“We predict secondary inflationary outcome will be shift towards more expensive personal leases rather than company provided fleets,” says Willmer. “These personal leases will attract higher funding rate due to the risk factors involved. In addition, they will raise administration fees due to the number of individuals that will need to be catered for.”
All of the leasing agents I spoke to said they were already seeing more interest in personal leases from financially sound individuals. Some leasing companies (Orix is one example) have already come up with packages to diminish the effects of increased FBT by offering Employee Leases. Apart from saving clients administration time, these employee leases don’t attract cent on FBT and provide full maintenance.
Leasing is currently in vogue, just as surely as the words “hire purchase” carry stigma. But it is an option worth exploring. Some clients decide that although leasing takes the car off the balance sheet, it doesn’t provide an asset at the end of the lease period. Dean Smith from Volvo says that his personal bias is for hire purchase. “