Friday, July 21, 2017
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Why do businesses lease vehicles?


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New Zealand: home to the All Blacks, the Southern Alps, Pavlova, Tip-Top ice-cream, kiwi ingenuity and… the world’s highest vehicle depreciation rates.

Yes, you read that right. Carspring did a study on how much value cars lost over a period of time and we came out on top at 53.67 per cent. The United Kingdom in second place at 51.9 per cent and the United States in third place at 50.82 per cent. Argentina, who rounded out the top 10, had a depreciation rate of 44.82 per cent.

We have one garden landscaping client who used to buy their company vehicles outright every four or five years for $50,000. The upfront capital required to buy the vehicles was quite large. Assuming they did 14,000kms a year, after four years their vehicle would only be worth $23,165. In four short years, they would stand to lose more than half of the vehicle’s value.

Over time, there are some business assets like property which appreciate. Other assets like machinery, office equipment and vehicles depreciate.

As vehicles lose a lot of value in a very short period of time, leasing has become an attractive option for businesses.

Simply put, vehicle leasing is a finance tool that allows a business to acquire vehicles. The lease company owns the vehicle and you pay a set amount each month to rent and use the vehicle.

A big benefit of leasing a vehicle is the tax benefits which come with it. On a traditional hire purchase, only the GST on the full amount can be claimed for tax purposes. A traditional fixed term operating lease meanwhile is 100 per cent tax deductible as an operating expense. It’s one of the first benefits we’ll go through with someone who is looking at leasing.

It is also off the balance sheet, so you won’t have any capital tied up in a depreciating asset. It allows businesses to invest that capital in more productive assets. We saw this the other day when one of our clients said that switching to leasing has allowed them to invest more in their marketing efforts.

These are just a few of the reasons businesses enjoy leasing vehicles over buying them outright. At the end of the day, it comes down to preferences. Some companies just enjoy the benefits which come with full ownership. You can customise it however you like and you decide on when you want to get rid of the vehicle.

Vehicle leasing how grown in popularity though. And if the depreciation rates on vehicles stay as high as they are, expect that trend to continue.


 
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