Should you Lease or Buy?

Should you Lease or Buy?

Should you lease or buy?

Our clients often ask whether they should leave or buy. Most businesses face this question sooner or later whether it be for property, plant or equipment. One of the myths is that leasing is more tax efficient. But with so many things in life, that depends.

Certainly if you like to upgrade equipment frequently then leasing is often the way to go. if you want a new tablet or PC but know that you won’t be able to resist the latest model that comes along within 3 years, then leasing is definitely for you – so long as you can afford to. If on the other hand you get emotionally attached and are likely to hang onto a computer until retiring it to the computer collection at MOTAT, then buying will be the way to go.

That said, there are a number of things to be aware of when leasing:

1. Don’t be persuaded by the “tax advantages” that salesmen talk about. The chances are that tax advantages exist even if you buy an asset – but they may just be labelled in a different way. How’s that? Well, when you lease, the lease payments are generally deductible. If you buy, the depreciation is deductible and if you borrow money for the purchase, the interest should be as well. The real difference here is timing.

2. When you buy, you enjoy a large GST refund straight away. If you lease, this is likely to be drip fed over the life of the lease. Bear in mind though that if you eventually sell the asset, you may need to pay some of that GST refund back.

3. Make sure you calculate the total cost of a lease. In some instances you can end up paying almost double the purchase price. If that’s the case, it might be a better course of action to buy the asset even if that means raising a loan.

4. Be careful to examine the terms and conditions of any lease. Many leases require you to return equipment in almost the identical condition it was on the day you had it delivered. We have heard of horror stories where people have had to spend large sums of money on car repairs in order for the lease company to take a vehicle back.

5. Are you certain you’ll still need the asset a year or two down the track? If you own it, you have the freedom to sell it when you no longer have a use for it.

6. If cashflow is the real motivation for leasing, have you considered a bank loan?

The article is based on a rental lease. Finance leases exist which essentially enable you to buy an asset and pay it off. So, should you lease or buy? If you are contemplating any asset purchase and would like us to look into the options for you, please get in touch.

Angus is the CEO and founder of Generate Accounting.