Owning or Leasing - the Pros and Cons

Many small-to-medium New Zealand businesses face a decision when acquiring equipment or vehicles, whether to buy to own the asset or lease it. This choice affects capital, cash flow, and tax outcomes. Understanding the high-level pros and cons of each option helps owners and managers choose the best approach for their business.

Pros and Cons of Buying vs Leasing

Owning (Buying): Owning an asset means a large upfront cost (or loan financing), but it can be cheaper in the long run once the equipment is paid off. You gain an asset with resale or collateral value. On the downside, buying ties up capital and you are responsible for all maintenance and repair costs. The asset also depreciates over time, so it may lose value or become outdated.

Leasing: Leasing avoids the heavy upfront investment by spreading costs into regular payments, preserving capital and cash flow. These payments are predictable and often include maintenance, making it easier to budget for equipment use. Leasing also lets you upgrade to new equipment more frequently to access the latest technology. However, leasing can cost more overall in the long run, and you have no ownership of the asset at the end. Lease agreements may also impose usage limits or penalties such as restrictions on use or fees for early termination.

Tax Considerations

For income tax purposes, lease payments on business assets are fully deductible as operating expenses. In contrast, when you buy an asset, you capitalise it and claim depreciation deductions over time rather than expensing the full purchase cost. If the asset is financed, then the interest portion of the month loan instalment only is deductible.

In terms of GST, purchasing a business asset usually allows you to claim the GST on the purchase upfront, while leasing means you claim GST on each lease instalment. Finally, if a company vehicle is made available for personal use (e.g. an employee takes a work car home on weekends), fringe benefit tax (FBT) applies whether the vehicle is leased or owned. The only way to avoid FBT on a company vehicle is to restrict it to 100% business use.

Making the Best Choice

In summary, buying tends to suit businesses that can afford the upfront investment and need the asset long-term, as ownership often provides better value after the initial cost is recovered.

Leasing is attractive for preserving cash flow and maintaining flexibility to upgrade assets, though it may result in a higher total cost over time depending on how the capital not used in the purchase is used to create other income and profits.

The key is to evaluate your company’s cash position, how critical the asset is to operations, and the tax implications. The answer is not black and white!

Reach out to Steve at SAS Business for a chat about your specific circumstances. There are other financing methods that can also be explored.