Motor vehicle ownership options

You have decided to change your vehicle. To work out the most viable option, you are likely to consider whether to purchase (outright, by standard hire purchase, or hybrid hire purchase) or whether to lease (finance lease or operating lease) and the most effective ownership option (business ownership, private ownership, or a hybrid option).

The most viable option for your purchase will vary according to your individual circumstances and will take into account:

  • the value of the vehicle
  • annual mileage
  • the extent of business and private usage
  • whether the vehicle is available for private use
  • the taxable income of the person provided with the vehicle
  • available business funds, and
  • other specific issues relating to individual circumstances.
We have assisted a number of clients to evaluate these options. Key factors to consider when making a decision are provided below.

Leasing is becoming more popular
Leasing has become more popular in recent years. Leases are no longer restricted to new vehicles and are now available for quality used vehicles. Short term leases are also available. Leases generally fall into two categories - operating lease and finance lease. Under a fully maintained operating lease, the lease company takes full liability for the ownership and maintenance of the vehicle and the cost of the vehicle for the period of the lease is fixed in advance.
A finance lease, also known as a lease to own, usually means the lessee can make an offer to buy the car at the end of the lease period based on a residual value set at the beginning of the lease term. For income tax purposes operating lease payments are expensed over the term of the lease in contrast to the finance lease arrangement which is treated in much the same way as a hire purchase transaction.
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Leasing is not necessarily more expensive. The cost of a lease is based on the initial cost of the vehicle, the maintenance costs, finance costs less calculated residual value based on the lease company’s experience in disposing of the vehicles at the end of the period. It is usual for a lease company to have favourable fleet discount arrangements which means the buying price is usually a lot lower than available outside the trade. Comparing a lease arrangement to a hire purchase arrangement with a guaranteed buy-back price gives a good comparison of the finance rate and competitiveness of a lease deal.

Hire purchase developments
Hybrid hire purchase arrangements have developed in recent years offering flexible principle repayments including small or no deposit, balloon payments at the end of the hire purchase term and also a guaranteed buy-back price that the dealer will pay for the vehicle at the end of the term. Maintenance contracts are also available for the term of the agreement. These arrangements are more geared to the private market and offer some of the benefits of a lease arrangement as the cost of the vehicle can be calculated at the outset.

FBT issues
Fringe benefit tax (“FBT”) can be a large cost for a vehicle operator given it is geared to the original purchase price for the vehicle for the whole of the vehicle’s tenure. Several recent rulings from the Inland Revenue Department have gone the way of businesses and removed the uncertainty of tax treatment of annual renewable vehicle leases offered by some lease companies.

The Inland Revenue Department’s ruling have determined that flexible year by year leases of the same vehicle are acceptable. The annual lease arrangement means FBT is payable on the value of the vehicle at the commencement of each year’s new lease arrangement. It is not yet known if this favourable tax ruling will prove to be short lived. The Minister of Finance has called for a report from the Inland Revenue Department and has confirmed the Government was concerned about the potential loss of revenue. A change in the legislation may therefore result.
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Flip leases may be a option for some
9 to 5 leases or flip leases have evolved over recent years to reduce the impact of FBT particularly in cases where expensive vehicles are used primarily for business use or for larger fleet owners where the cost of putting in place such an arrangement can be spread over a number of vehicles. Under these arrangements the business only leases the vehicle for the period of the business day or when the vehicle is used for business use and therefore no vehicle is provided to the employee for private usage. Arrangements of this nature require the employee to assume some or all of the risk of vehicle ownership.

Leases of this type need to be properly constructed and ongoing vehicle log books and records need to be maintained. To maximise the benefits under such an arrangement also requires the employee to be GST registered. Such lease arrangements can easily fall over if the documentation is not properly prepared or correct records are not maintained for the duration of the lease term. Common mistakes and risks with such arrangements include failing to make lease payments on a regular basis, keeping the car for more than 45 months so that the lease becomes a finance lease, selling the car and replacing it with another vehicle without establishing a new lease arrangement, making the provision of the motor vehicle and condition of employment and failing to monitor compliance with the arrangement on an ongoing basis.

GST considerations
GST must also be factored into the equation. Business ownership usually allows GST on the up front purchase and ongoing running costs to be claimed. GST can be an additional cost of purchase under private ownership. It is not uncommon for businesses to utilise the GST claim on the purchase of vehicle as their deposit under a hire purchase arrangement.

This is an area with numerous alternatives. The challenge is to select the most appropriate ownership option for your circumstances.

We are able to assist you through the decision process.