Buying vs Leasing a Vehicle for Your NZ Business: What Makes Financial Sense

One of the most common questions we get from business owners is whether to buy or lease their next vehicle. There is no universal right answer — it depends on your cashflow, how you use the vehicle, your tax position, and your preferences around ownership. Here is how to think through it.

Buying means you own the vehicle outright (or via a loan). You claim depreciation each year as a tax deduction, and you can claim interest on any loan used to finance it.

Leasing means you pay a monthly fee to use a vehicle you do not own. The lease payments are generally fully deductible as a business expense (subject to the private use adjustment discussed below).

There is also a middle ground — hire purchase — where you make payments over time and own the vehicle at the end. This is treated similarly to buying for tax purposes.

When you buy a vehicle for business use, you can claim:

Depreciation You claim the cost of the vehicle as a deduction over its useful life using IRD's depreciation rates. For motor vehicles, the diminishing value rate is 30% (straight-line: 21%).

However, there is a cost price limit for passenger vehicles: IRD caps the depreciable cost at $57,143 (as at 2024 — check current guidance). If you buy a $90,000 SUV, you can only depreciate it as if it cost $57,143. This limit does not apply to commercial vehicles (utes, vans, trucks).

Interest on finance If you borrow to buy the vehicle, the interest is deductible in proportion to business use.

Running costs Fuel, insurance, WOF, registration, servicing — all deductible in proportion to business use.

Lease payments are deductible as a business expense, in proportion to business use. There is no depreciation calculation — you simply deduct the lease payments as they are made.

This is simpler than the depreciation calculation for purchased vehicles, and the cost price limit does not apply to leases in the same way. If you lease a $90,000 vehicle, you deduct the full lease payment (adjusted for private use) — not a capped amount.

Whichever option you choose, you can only claim the business use proportion of costs. If you use the vehicle 70% for business and 30% privately, you claim 70% of depreciation, lease payments, interest, and running costs.

You need to be able to support your business use percentage. A logbook is the standard method — IRD requires a logbook for at least 90 consecutive days to establish your business use percentage, which you can then apply for up to three years before repeating.

If the vehicle is owned by a company and available for private use by a shareholder-employee, FBT applies. FBT is a tax on the benefit of having a company vehicle available for private use — it applies even if the vehicle is not actually used privately, just if it is available.

FBT applies to both purchased and leased vehicles. It is calculated on the cost price (for purchased vehicles) or the tax value (for leased vehicles). This is a significant cost that many business owners overlook when deciding between personal and company ownership of a vehicle.

If FBT is a concern, one option is to have the vehicle owned personally (not by the company) and claim a mileage rate for business travel instead.

Buying:

• Higher upfront cost (or loan repayments including principal)
• You build equity in the asset
• Residual value when you sell (which may trigger depreciation recovery)
• Less predictable costs (maintenance, unexpected repairs)

Leasing:

• Lower, predictable monthly payments
• No large upfront outlay
• No residual value — you hand the vehicle back at the end
• Often includes maintenance in the package (operating lease)
• Off-balance-sheet (the vehicle is not your asset or liability)

For businesses with tight cashflow, leasing often makes more sense because it preserves working capital. For businesses with strong cashflow that want to build equity, buying may be preferable.

Neither is universally better. The tax outcome depends on:

• Your marginal tax rate — higher rates make deductions more valuable
• The vehicle's cost — the cost price limit bites harder on expensive vehicles, making leasing relatively more attractive for high-value vehicles
• Business use percentage — higher business use makes both options more tax-efficient
• GST registration — if you are GST-registered, you can claim GST on purchase price or lease payments (subject to private use adjustment)

For a $60,000 ute used 90% for business by a company paying 28% tax, buying and depreciating will likely produce a similar tax outcome to leasing over the vehicle's life. The timing of deductions differs — depreciation front-loads deductions in early years — but the total deduction over the vehicle's life is similar.

Flexibility: Leasing gives you flexibility to upgrade vehicles more frequently. If your business needs change or you want newer technology, a lease makes it easier.

Ownership: Some business owners simply prefer to own their assets. If you keep vehicles for a long time and maintain them well, buying often works out cheaper over the long run.

Residual risk: When you buy, you bear the risk of the vehicle's residual value. If the market for used vehicles drops, you may sell for less than expected. With a lease, this risk sits with the lessor.

Credit: Leasing may be easier to obtain than a loan for some businesses, particularly newer ones without a long credit history.

For most small businesses, the decision comes down to cashflow and how long you keep vehicles:

• Keep vehicles long-term (5+ years): Buying usually makes more financial sense
• Upgrade frequently (every 2-3 years): Leasing is often more practical and cost-effective
• Tight cashflow: Leasing preserves working capital
• High-value passenger vehicles: Leasing avoids the cost price limit on depreciation

Before making the decision, run the numbers for your specific situation — or ask us to do it for you.

Contact Eastmure & Associates if you would like help comparing the buy vs lease decision for your next vehicle. We can model both options for your specific tax position and cashflow situation.