Tricks of The Rich and Infamous

[hwd007]

Is it true that you should invest in assets that increase in value over time and lease assets that decrease in value over time ?

e.g.. invest in a house & land component, but lease a car ? as the house increases in value and the car decreases in value over time.

Also a leased asset like a vehicle can be written off as an expense in a financial year, making ownership more cost effective and upgrading cheaper. This sort of makes sense if the asset looses value and is not worth owning after x number of years. i.e. your average sedan. Especially if the lease contract includes regular servicing to maintain the vehicle.

Where as the house and land generally increases in value and is thus worth owning, but depreciating ( the house ) over time.

Huh ?

 

[duncan_m]

Originally posted by hwd007
Is it true that you should invest in assets that increase in value over time and lease assets that decrease in value over time ?

e.g.. invest in a house & land component, but lease a car ? as the house increases in value and the car decreases in value over time.

Hwd,

Leasing a car doesnt insulate you from the losses incurred.. YOU still fund the depreciation..

It costs much the same to lease a vehicle as it does to own it.. from a tax perspective there's really not much difference either.. when you lease a vehicle you claim all the payments and not the depreciation.. When you own a vehicle you can claim the depreciation and the interest portion of your payments (if you have a loan)..

Get an old banger, drive till it dies then either get another one or put another engine in it..

Also dont fall into the trap of kidding yourself that because its work related your paying for it in pre-tax dollars and somehow this justifies the whole deal, it doesn't justify, if you manage your tax well enough and buy enough depreciable property you wont pay any tax anyway!

The whole NewCar + Finance thing is great! It's honestly the biggest barrier that the majority of the population have to wealth.. it delays first home ownership, it swallows equity in their homes and they continue to do it.. every few years they start looking at their neighbors and friends cars and thinking "hey they look newer" and off the toddle to the car dealership for a trade-in and a new round of finance.. and guess what.. its only going to get worse, the engineering standard in modern vehicles are terrible, bits of plastic fall off, the paint is terrible the panels are paper thin, for this reason people cycle their cars much more frequently now and the pace will pick up over the next few years..

Look at the commercial breaks on television.. in almost 100% of all commercial breaks at least one new car advertisment is featured.. its one of the biggest businesses in Australia and its riding on the back of the property boom and home equity loans.. Dont be like that, be a contrarian.. drive a **** car and buy yourself another house.. if you get depresssed at driving a crap car then you still have a poor persons mindset.. When you're wealthy and you can afford a decent car (and by afford I mean it doesnt impact your wealth creation/maintenance plans) then go find an Auction and by something that some poor person has incurred the lions share of the depreciation on.

Duncan.

 

[MarkB]

Originally posted by hwd007

Where as the house and land generally increases in value and is thus worth owning, but depreciating ( the house ) over time.

Huh ?

The rationale here is that the house is just a structure and as such:

- is replicable, and

- wears out over time (that is, needs to be replaced at some point, though the Pyramids still stand after thousands of years - imagine the depreciation on those babies!)

Remember also that depreciation on IP's is an on-paper cost only.

Certain types of land are not easily replicated (such as waterfront blocks at Point Piper) and land doesn't need to be replaced over time.

Mark

 

[steven]

Hi Duncan,
Interesting topic, I know very little about leasing, but i have been thinking about the pros and cons of leasing a $5500 lap top for a new buisness venture,
The pros as I see it could be, the tax deductions on payments,
and the ability to upgrade to a new model when needed, as the technology on pc/lap tops seems to become out dated rather fast,

But as i said I know very little on this subject so I would appreciate any info.
Regards Steven

 

[duncan_m]

Originally posted by steven
Hi Duncan,
Interesting topic, I know very little about leasing, but i have been thinking about the pros and cons of leasing a $5500 lap top for a new buisness venture,
The pros as I see it could be, the tax deductions on payments,
and the ability to upgrade to a new model when needed, as the technology on pc/lap tops seems to become out dated rather fast,

But as i said I know very little on this subject so I would appreciate any info.
Regards Steven

Steven,

Leasing a laptop generally works out more expensive than buying one. The one attraction to lease is that you dont need a huge wad of cash to get one.. Tax wise you will be able to depreciate the cost of a Laptop you BUY and any interest incurred on finance to buy the laptop will be deductible.. This is what a lease essentially is, a rolling up of the interest and depreciation into a single payment..

I'd love to know something about your business, a $5500 laptop is incredibly expensive given that Dell now retail some fantastically spec'ed laptops for <$AUD2000

 

[Peter_Tersteeg]

Originally posted by steven

Interesting topic, I know very little about leasing, but i have been thinking about the pros and cons of leasing a $5500 lap top for a new buisness venture,
The pros as I see it could be, the tax deductions on payments,
and the ability to upgrade to a new model when needed, as the technology on pc/lap tops seems to become out dated rather fast,

To me leasing a computer doesn't make sense.

1) The cost of leasing it over a preiod of time usually costs twice as much than it would to buy it outright now.

2) If it's for a business use, you can still claim all the tax benifits.

3) The ongoing payments deduct from your servicablity, paying for it now actually helps your servicablity through the futuer tax deductions.

Over 2-3 years, the numbers look about the same. The lease then encourages you to upgrade. When buying it outright you might still want to upgrade, but you're more likely to consider the pain in buying a new computer and more likely to make use of what you've got until you really need to upgrade.

*HINT* A 3 year old computer is more than adiquate for browsing the web and using Microsoft Office (Word, Excel, Powerpoint). About the only software you need the latest hardware for is the latest computer games. DOOM 3 - bring it on!

 

[Aceyducey]

Isn't leasing really about changing the cashflow implications.

Rather than paying a big lump upfront, you are able to reduce the outlays at any point in time & therefore make it easier to carry.

Of course there is a cost for this - however also take into account the value of money, over a long-term lease it may be that inflation means that you're not paying that much more.....of course PCs aren't long-term items

You must also ask:
Can you afford a large lump sum payment up front?
is it more cost-effective to borrow money to pay a lump sum & pay off a loan rather than a leasing agreement?

Also, it depends on your involvement with the item. I know people who lease PCs because they get support & free upgrades thrown in....they don't have to become an expert.

Cheers,

Aceyducey

 

[Kevmeister]

Originally posted by steven
Hi Duncan,
Interesting topic, I know very little about leasing, but i have been thinking about the pros and cons of leasing a $5500 lap top for a new buisness venture,
The pros as I see it could be, the tax deductions on payments,
and the ability to upgrade to a new model when needed, as the technology on pc/lap tops seems to become out dated rather fast,

But as i said I know very little on this subject so I would appreciate any info.
Regards Steven

Steven:

Consider using a salary sacrifice arrangement with your employer (if they are agreeable) to get your laptop. The benefits:

1. There is no FBT on notebooks (or wasn't last time I checked).
2. The employer will claim the 10% GST as an input tax credit and should therefore charge you only the pre-GST price of the notebook.
3. Whilst you cannot claim any tax deduction for the notebook, it's been paid for out of your pre-tax dollars. You get the value of the deduction in your hand immediately rather than depreciating it over 3 years or whatever. $1 in your hand today is better than $1 in your hand 2 years from now.

And, a $5500 notebook is overkill. I bought mine (a Dell) for $3000 in May - 2.8Ghz processor, 512Mb memory, 40Gb disk, 15" TFT screen, CDRW, DVD, floppy, modem, LAN, etc. This same machine is now only $2600 from Dell. Buy at a sensible price point.

Kevin.

 

[Sim]

Like previously said... the only reason I see for leasing a laptop is purely a cashflow one - and only then if you really really have a cashflow problem, in which case why are you buying new equipment anyway ?

You can buy really good and powerful laptops for only a couple of grand now - and you still get to depreciate it, so tax wise it's still effective. And buying yourself will save you a LOT of money over the life of the machine compared to leasing it.

Rates for RentSmart and others are around 18% in some cases - that's extremely expensive finance, you'd be better off buying it on your credit card and taking the frequent flyer miles too !

IBM's most expensive laptop at the moment costs $5,500 (T40p) - and is a very nice machine, and we need that kind of power for what we do at work. However the other 99% of the population don't need that kind of power... an R series laptop with almost as much power will only set you back $2K - $3K. In fact, there are some IBM laptops now selling for as little as $1,600 - so there's no need to spend an absolute fortune.

Salary sacrifice through work ends up with exactly the same nett tax benefits as buying and depreciating, but the salary sacrifice option is a better choice if you can do it - since you get your tax benefits all in year 1 !!

 

[ella]

Originally posted by Kevmeister
[And, a $5500 notebook is overkill. I bought mine (a Dell) for $3000 in May - 2.8Ghz processor, 512Mb memory, 40Gb disk, 15" TFT screen, CDRW, DVD, floppy, modem, LAN, etc. This same machine is now only $2600 from Dell. Buy at a sensible price point.

Kevin. [/B]

But - if, for example, you're a graphic designer and use a top-end Mac laptop, that's the price you pay. They are expensive to buy, but wonderful to use and need very little IT support (and virtually no viruses are written for Macs)!

(speaking as a web-developer Mac-user myself!)

- ella

 

[Kevmeister]

Sim:

I think salary sacrificing is still "slightly" better because you essentially pay pre-tax for the pre-GST price of the machine. If you buy it yourself (inc GST) you'll get a tax refund on at most 50% of that GST component. On a $3K notebook that makes salary sacrificing still $150 better off, based on the highest tax rate.

And, I'm really interested to know what particular feature IBM's notebook has for $5500 that can't be gotten in something around the $3-3.5K mark?

 

[hwd007]

OK so say I want a new car but cant afford to borrow the cash for one up front or in fact prefer not to own one. Seems to me that;

1. Leasing

2. Renting


Are viable options. No cash up front and 100% tax write off as its an expense to you. Well i.e. if I registered it for commercial use.

What about the difference in costs between leasing and renting ?


Also if I rent or lease it through a trust ?

 

[duncan_m]

Originally posted by hwd007
OK so say I want a new car but cant afford to borrow the cash for one up front or in fact prefer not to own one. Seems to me that;

1. Leasing

2. Renting

Are viable options. No cash up front and 100% tax write off as its an expense to you. Well i.e. if I registered it for commercial use.

What about the difference in costs between leasing and renting ?

Also if I rent or lease it through a trust ?

OK I dont think you've been following the thread very closely.

Leasing a car is the same as borrowing money to buy it.. it works out the same. Whilst you say you don't want to own it I'm sorry to say that leasing a vehicle brings with it the same problems as ownership.. If you dont look after it your value drops below what the residual is and you need to pay the leasing company extra money.. you have to insure it.. you have to pay the registration..

Just because you lease it, and registered it for commercial use it doesnt give you magical tax status.. if it not used for commercial purposes then you cant legitimately claim it.. if its only partly used for commercial purposes you can only partly write off the lease costs..

You cant really "rent" a car.. You can go to Hertz or Avis and hire one, but that would cost you a fortune if you're looking for a newish car..

The bottom line is this:

Owning and Leasing deliver the same Tax outcome. You cant drive a new car and not get away with essentially 'owning' it.. You're the person who pays for all of the running costs and has to 'pay' for the depreciation. This isnt complicated. I feel you're not telling us something..

Also you say you can't afford to 'borrow the cash' for one upfront. The SAME qualifications/credit checks that would apply to borrowing money for a personal loan for a car are applied to the qualification for a Lease.. They do check if you can afford it, and whilst the credit code is relaxed if you sign a commercial use agreement you really need to take a long think, if you dont qualify for the personal loan then you wont be able to service the lease costs either.

Duncan

 

[Kevmeister]

Duncan:

Actually, you can "rent" a car. There are different forms of leases. There are finance leases and there are operating leases.

Operating leases are all about "renting" a car. You don't pay for any of the up-keep, it's all factored into the monthly payment.

Of course, the payment factors in the kms you are going to do, and there are usually penalties of some description if you exceed the kilometres.

 

[duncan_m]

Originally posted by Kevmeister
Duncan:

Actually, you can "rent" a car. There are different forms of leases. There are finance leases and there are operating leases.

Operating leases are all about "renting" a car. You don't pay for any of the up-keep, it's all factored into the monthly payment.

Of course, the payment factors in the kms you are going to do, and there are usually penalties of some description if you exceed the kilometres.

I stand corrected then.. Love to see some figures, bet it costs more than Lowning ( leasing or owning )

BangerDriver..

 

[bundy1964]

So Dunc

How does the cost of the Bedford compre to leasing?

bundy

 

[duncan_m]

Originally posted by bundy1964
So Dunc

How does the cost of the Bedford compre to leasing?

bundy

haha I paid $1000 for Edford the Bedford.. it might cost me $9-10K to put him back on the road in the style I want.. but he's going to be great for my development/reno business.. the ute just isnt big enough any more

For those of you wondering what the hell Edford the Bedford is.. his diary can be found here:

http://tinyurl.com/5r8c

 

[astroboy]

hwd007,
Simple answer, talk to your accountant. This really depends on your circumstances. My company has both bought and leased, both laptops and cars. It depends.
How many large companies own their fleets ? How many lease their computer hardware ? There are pros and cons for both options.
astroboy.

 

[Sam_H]

Duncan;

I'm 100% with you re driving a banger

Im not a car person (dont get me wrong I'd enjoy a nice car if given to me)....but after loosing about $3k in 6 months selling a Ford Fairmont, I quickly got over the fun of having a decent car

I own outright my banger (couldnt flog it for more than $1000 now)...but it does the job, and I dont feel bad about throwing in surfboards/wetsuits/dirty bikes etc

Cheers

Sam

 

[astroboy]

Ok another perspective. I'm 100% against bangers.
Unreliable & let you down at the least convenient moments. Usually require constant ongoing repairs - as soon as you fix one thing another subsequently breaks.
Long trips - forget it.
Usually environmental stinkers.
Uncomfortable in comparison to modern day counterparts. Generally resource inefficient.
Leaded petrol - not nice for the planet.
Air cond? but this is QLD - gasp !
Finding parts can be like a *long* treasure hunt.
I could go on and on and on......
been there, done that, got the t-shirt and not going back.

astroboy.