In more recent times, vehicle leasing has stretched well beyond the exclusive domain of large companies needing fleet of mid-range vehicles.
In fact, growing number of company directors, business owners, professionals and sole traders (those in the top earnings quartile) have twigged that the benefits of leasing are also available on brand new luxury marques – even if only single vehicle is leased. Not surprisingly, this sector of the market is also looking for lease options over outright purchase. Also making leasing more attractive is significantly lower cost of entry into these high-ticket assets.
Catering for this group’s leasing needs tends to be the domain of boutique-style vehicle lease companies like GE Capital Fleet Services and Allied Leasing. Car people, turned financiers, these two companies have the most experience in leasing luxury vehicles. Peter Martin, general manager of Allied Leasing (part of the Pyne Gould Corporation), has witnessed growing demand for luxury vehicles in the $100,000-plus range since October last year.
What’s driving unprecedented demand, says Martin, is the strong underlying and counter-cyclical nature of New Zealand’s economic growth. When it comes to vehicles for sales reps or even management, there are some standard fleet options available. But he says when it comes to luxury vehicles, each new leasing arrangement must be customised according to personalised requirements.
Company owners, sole traders, dentists, architects and other professional people are understandably guarded about revealing too much about their businesses. But finding out if leasing really is their best option requires certain level of frankness, says Martin. In other words, to ensure individuals end up with the best personalised deal, means finding out how their businesses operate. “Unlike many large fleet leases, leasing luxury vehicles is more question of understanding unique business needs and tailoring lease option to best match each unique business structure.”
Key points to consider when thinking of leasing luxury marques include:
* Number of kilometres driven annually. This is because the residual value is affected by the mileage, and this mileage impacts the monthly rental cost.
* Needed flexibility to change cars and lease contracts regularly. lot of luxury vehicles have an abnormal depreciation curve compared with regular vehicle. Under lease arrangement, the depreciation is calculated in straight line for the life of the lease. Because the depreciation is calculated at the same fixed amount for the life of that lease, there is no risk from market fluctuations.
The key to offering attractive lease rates and terms on expensive cars, says Chris Anderson, general manager with GE Capital Fleet Services (part of the GE company worldwide), is knowing the real depreciation rates on them – as well as knowing who will buy the vehicles when they’re returned. “People driving cars of this value tend to change them more regularly than the average run-of-the-mill motor vehicle – and the key then is disposing of late model luxury vehicle in the market,” says Anderson.
Fortunately, the large database of customers held by GE Fleet Services and Allied Leasing means they can often find new client for used luxury vehicle that may be returned off lease early. This is very advantageous as there is often major drop in the value of the vehicle resulting in lower value for FBT purposes the second time around.
* Associated residual risk. “We’ve started seeing the completion of what happened three years ago. The absorption of tariff reductions has now filtered through the system. With the stabilisation of prices, there’s more consistency with residual values. Consequently, the net cost of leasing is dramatically lower than at any other time. People are driving far better cars for the same sort of money,” says Martin.
* The associated tax implications and how FBT can be minimised. There is no way to avoid FBT, but it can be minimised through leasing option. For example, take someone on the highest tax bracket driving $100,000 car. For tax purposes, the car is calculated at 64 percent and FBT is paid on six percent of that value (plus GST) – the total annual cost is $17,280. By comparison, the person who owns this vehicle will pay $17,280 annually until the vehicle is sold.
A common way to minimise the FBT amount is to take out 12-month lease with right, but no compulsion, to renew. The law allows the FBT charged in years two and three to be reduced proportionate to the car’s depreciating value. The key to 12-month lease, says Anderson, is knowing accurately what the vehicle will be worth at the end of the 12 months. “This is determined in close conjunction with the motor dealers. And because of close relationships with dealers, there is often an unwritten agreement that should the vehicle be returned the dealer will honour that value. Without close working relationship this would not be the case,” says Anderson.
Like Allied Leasing, GE Capital has very strong relationships with nearly all the major luxury motor vehicle dealers. In fact, both companies work closely with the motor dealers to tailor new leases. It’s these relationships, says Anderson, that enable clients to change their vehicles if necessary at the minimum of cost to the customer and sometimes at no cost. “This close relationship enables GE [formerly owned by motor vehicle guru Colin Giltrap] to discuss individual leases on one-by-one basis enabling maximum discounts when required, to achieve the sale and subsequent lease.”
• Buy and lease back. The practice of selling vehicles to leasing company, and then leasing them back removes these assets from the balance sheet, frees up capital and helps to reduce FBT costs.
A good portion of luxury vehicle leases are one-off leases to small business people with limited vehicle requirements. But leasing fleets of luxury cars can also be arranged. So is there any real difference in leasing one or five luxury cars? In reality the answer’s no. But even if company leased four or five vehicles for its directors, Martin says the individual leasing arrangements on those vehicles can and does vary according to mileage and each individual’s financial arrangements. “For example professional director on five boards, may spread their lease costs across five different companies,” says Martin.
What vehicles have the sweet-spot of the luxury market right now? Alfa Romeo, Volvo and Jaguar, remain perennially popular. But Martin says when assessing quality for money, Volkswagen is arguably the pick of the bunch. Nevertheless, BMW is reaffirming its market presence through some aggressive pricing. Supply has always been an issue for the marques. But the growing alignment of specifications with Australia means that product, assuming it’s available, can now be sourced from this market. “There are many behind-the-scene issues affecting lease considerations on luxury vehicles. This is why it’s important that those in the market recognise that informed advice does add value,” says Martin.
Business or pleasure?
Before making any decisions, he recommends those in the market for luxury vehicle look at whether they want the ability to claim expenses back through their business. “Are there legitimate ways to claim costs associated with their car usage? If the biggest single issue is FBT, it then becomes case of working out the best way to minimise costs going forward.” M
Mark Story is regular writer in Management magazine.
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