Car Leasing – What Are Your Options?

There are a few different types of Lease options for cars and each one has its purpose in different circumstances. All Lease Agreements are when the title of the car remains the ownership of the Lessor. (financier)

Personal or Consumer Lease

With the introduction of the National Consumer Credit Protection (“NCCP”) Act, these types of agreements are slowly fading away from the industry. They are Lease Agreements for personal use with no real advantages to the borrower. They are being faded out as the disclosure on Lease Agreements are minimal, meaning the borrower does not usually have interest rates, and all fees and charges explained in detail like they would a normal consumer car loan. The borrower may not also have the flexibility on how they would like to structure their loan either, due to being a Lease Agreement.

Finance Lease

The car is purchased by the Lessor (financier) and rented to the Lessee (borrower) with periodic rental payments. The car would be used predominantly for business use. At the end of the Lease would be a Residual Value, which is the forecasted, depreciated value of the car. The Lessee has the obligation to ensure that the Residual Value is met, by either buying the car off the Lessor for the Residual Value, or Leasing the Residual Value again over a new term, at the Lessor’s discretion. GST is claimed from the purchase of the car by the Lessor, if any and the rental payments are subject to GST payable by the Lessee.

Operating Lease

An Operating Lease is essentially a Finance Lease where the obligation of the Residual will be met by the Lessor. The car would be used predominantly for business use. This would mean that the car is handed back to the Lessor at the end of the Lease, regardless of any difference between the sale value of the car and the Residual Value. These Leases are not so common with cars anymore, but are still often used with plant and equipment. There also may be the ability to add running costs to your Operating Lease, referred to as a Maintained Operating Lease.

Novated Lease

A Novated Lease is a Finance Lease between the Lessor and the Lessee, who may be a normal PAYG employee, with the addition of a Novated Agreement in place with the employer of the Lessee. The employer would make the rental payments from the Lessee’s normal pay, which may be prior to their tax being deducted, reducing the employee’s taxable income. The Lessee may also have the ability to add various running costs to their agreement, reducing their taxable income more, or reducing their Fringe Benefits Tax Liability. This would be referred to as a Maintained Novated Lease.