Written byLease vs buy is the choice between paying to use an asset for a set term and owning it outright or with finance.
Also known as: lease or buy, leasing vs buying
Key points
- Compare total cost over the period you will actually hold the asset, not the monthly payment on its own.
- Count upfront fees, running costs, end-of-term charges, the residual value and any resale proceeds.
- Leasing keeps cash free and payments predictable; buying builds equity and often costs less if you keep the asset for years.
- For a business the tax timing matters: GST credits, depreciation against lease deductions, and FBT on employer-provided cars.
- Under AASB 16 most leases sit on the lessee's balance sheet, so the old off-balance-sheet difference between finance and operating leases has largely gone.
The two sides of the decision
Leasing means paying for the use of an asset for a set term without taking full legal title at the start. The forms differ: an operating lease leaves most of the risks and rewards with the lessor, a finance lease passes them to you, and a novated lease packages a car through salary sacrifice. Consumer leases over personal goods carry their own protections. Under AASB 16 a lessee recognises a right-of-use asset and a lease liability for almost all leases, with exemptions only for short-term and low-value leases, so leasing no longer keeps the commitment off the balance sheet.
Buying means acquiring legal ownership, outright or with finance. Under a hire purchase the lender funds the purchase and title can pass after the final payment, while a chattel mortgage gives you ownership from day one with the asset as security. You carry the depreciation and the disposal risk, and you keep whatever equity is left on sale.
Comparing the true cost
Work out the full cash impact over the period you intend to hold the asset. On the lease side that is the rentals across the term, upfront and administration fees, excess kilometre and wear charges, running costs, and the buyout figure if you plan to keep the asset. On the purchase side it is the deposit, the repayments, the fees and the running costs, less the sale proceeds you expect.
Normalise both quotes to the same term before you compare, and ask the lessor for the rate behind the rental so you can put it beside a loan quote on the same term. GST shifts the picture as well, since it is generally charged on each lease rental but sits in the price when you buy.
Tax, and what happens at the end
A GST-registered business can generally claim input tax credits on lease rentals as they are paid, or on the purchase price when it buys, in each case to the extent of business use. Buyers claim decline in value, and lessees usually cannot. The exception is hire purchase and leases with a purchase option, which the ATO treats as a notional sale and loan, so the customer claims the decline in value and the finance charge in each payment instead of the rental. Employer-provided cars and novated arrangements can attract fringe benefits tax.
At the end of a lease you can return the asset and settle any excess charges, pay the residual and keep it, refinance that residual, or trade it in. An inflated residual can hide a more expensive deal, and an optimistic kilometre estimate turns up as a bill at the end. Ask for a written excess-wear policy and a pre-inspection.
Not to be confused with
- Chattel mortgage
- a chattel mortgage is one way of buying rather than a lease, even though the repayments can look similar
- Total cost of ownership (TCO)
- total cost of ownership measures what owning costs; the lease versus buy question sets that against paying for use
Frequently asked questions
Is leasing cheaper than buying?
Not necessarily. Leasing usually lowers the upfront cost and makes cashflow predictable, while buying is commonly cheaper across a long ownership period once resale value is counted. Run the total cost over the period you actually intend to hold the asset.
Can a business claim GST on lease payments?
Generally yes. A GST-registered business can claim input tax credits on lease rentals to the extent the asset is used in the business. The credit follows each payment, rather than arriving upfront as it can on a purchase. Check the ATO's guidance or ask your accountant.
Are lease payments tax deductible for a business?
Lease rentals are usually deductible as a business expense, while a purchase is deducted over time through decline in value, or sooner if a write-off concession applies. The deduction gets there either way. What differs is the timing, and timing is what moves your cashflow.
What is a balloon payment and how does it affect the cost?
A balloon, or residual, is a lump sum due at the end of the contract. A larger balloon lowers the regular payments but leaves more to find at the end, in cash or by refinancing. An inflated residual can hide a more expensive deal, so check it.
How does FBT affect a novated lease?
An employer-provided car can attract fringe benefits tax, and a novated arrangement shifts parts of the tax position between employer and employee. The numbers depend on the package and the car, so check the ATO's FBT rules and talk to your tax adviser.
Related terms
Finance lease
A finance lease is a lease where the financier owns the asset and your business pays to use it for most of its life, taking on the risks of ownership.
Read definitionOperating lease
An operating lease is a lease where you pay to use an asset for a set term and hand it back, with the financier keeping ownership and the resale risk.
Read definitionChattel mortgage
A chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Read definitionHire purchase
Hire purchase is a finance agreement where a financier buys an asset and hires it to you for fixed instalments, with ownership passing to you at the final payment.
Read definitionResidual value
Residual value is the amount a leased car or asset is expected to be worth when the lease ends, set at the start and used to calculate the rentals.
Read definitionBalloon payment
A balloon payment is a lump sum, agreed upfront, that is paid at the end of a loan term and lowers the regular repayments by deferring part of the principal.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.