Leasing vs buying a car for tax purposes is one of the most common questions Australian business owners and employees face. Both options offer tax deductions, but they work in fundamentally different ways — and the right choice depends on your business structure, cash flow, and how you use the vehicle.
This guide compares the tax implications of leasing (novated lease, operating lease, finance lease) and buying (outright purchase, chattel mortgage) for the 2025–26 financial year.
Buying a car: tax deduction overview
When you purchase a vehicle outright or through a car loan (chattel mortgage), you own the asset. The tax benefits include:
Depreciation You claim depreciation on the business-use portion of the vehicle. The ATO car cost limit for 2025–26 is $69,674 — this is the maximum depreciable value, regardless of what you paid. The effective life of a car is eight years.
Using the diminishing value method on a $69,674 car:
- Year 1: $17,419 (25% of cost)
- Year 2: $13,064
- Year 3 onwards: declining amounts
Instant asset write-off Small businesses with turnover under $10 million can immediately deduct assets costing less than $20,000 in the 2025–26 financial year. This applies per asset, but the car cost limit still caps the depreciable amount for passenger vehicles.
Running costs Fuel, insurance, registration, servicing, and repairs are deductible based on your business-use percentage (logbook method) or via the cents per km method (88c/km, capped at 5,000 km).
GST credit If you are registered for GST, you can claim a GST credit on the purchase price — up to one-eleventh of the car cost limit. For 2025–26, the maximum GST credit on a car purchase is $6,334.
Loan interest If you finance the purchase with a chattel mortgage or business loan, the interest is deductible based on your business-use percentage.
Leasing a car: tax deduction overview
With a lease, you do not own the vehicle — the finance company does. You make regular payments for the right to use it. The tax treatment varies by lease type.
Novated lease (employees)
- Payments come from pre-tax salary, reducing your taxable income
- Employer pays FBT on the car benefit (47% FBT rate in 2025–26)
- FBT is typically passed through to you via salary deductions
- GST on the purchase price is claimed by the leasing company and passed on as savings
- Running costs (fuel, insurance, servicing) are included in the pre-tax package
- EVs below $91,387 are FBT-exempt, making novated leases extremely attractive for electric vehicles
Operating lease (businesses)
- Lease payments are fully deductible as a business expense
- No depreciation claim (you do not own the asset)
- GST credits on each lease payment (business-use portion)
- Vehicle returned at end of lease — no residual payment
Finance lease
- Similar to a loan — you have use of the car and a residual (balloon) payment at the end
- Lease payments are deductible (interest component + principal may be treated differently)
- Depreciation may still be claimable depending on lease structure
- GST credits available on payments
For a deeper look at FBT on leased vehicles, see FBT Car Benefits.
Side-by-side comparison
| Feature | Buy (outright/loan) | Novated Lease | Operating Lease |
|---|---|---|---|
| Ownership | You own | Finance company | Finance company |
| Depreciation | Yes (car limit applies) | No (employer claims) | No |
| Instant write-off | Yes (under $20K) | No | No |
| GST credit upfront | Yes ($6,334 max) | Claimed by lessor | No (per payment) |
| Loan interest deductible | Yes | N/A | N/A |
| Lease payments deductible | N/A | Pre-tax salary | Yes (business expense) |
| FBT applies | No (unless employee use) | Yes (except EVs) | No (business asset) |
| Cash flow impact | High upfront | Low (spread over term) | Low (spread over term) |
Which option suits sole traders?
Sole traders generally benefit from buying the vehicle. You claim depreciation, running costs via the logbook method, and GST credits on the purchase. There is no FBT because you are not an employee — you are the business owner.
Key considerations for sole traders:
- Use the logbook method to claim the business percentage of all costs
- Depreciation is capped at the $69,674 car cost limit
- A chattel mortgage lets you claim GST upfront on the purchase
- The instant asset write-off ($20,000 threshold) applies to eligible assets
For detailed sole trader car expense rules, see Sole Trader Car Expenses Tax Deductions.
Which option suits employees?
Employees who want to salary package a vehicle usually choose a novated lease. The pre-tax payments and GST savings make this the most tax-efficient option for employees — especially those in higher tax brackets.
If you are buying an EV, the FBT exemption makes a novated lease the clear winner. The entire lease and running cost package comes from pre-tax income with zero FBT. On a $60,000 EV, this can save $5,000–$8,000 annually compared to buying the same car after tax.
For traditional petrol or diesel vehicles, the FBT cost reduces the benefit. Run a detailed comparison with your employer’s packaging provider before committing.
Which option suits companies?
Companies (Pty Ltd) can either purchase vehicles as business assets or lease them. The choice depends on:
- Cash flow: Leasing preserves working capital; purchasing requires a larger upfront outlay
- Balance sheet: Purchased vehicles appear as assets; operating leases keep the liability off the balance sheet (though accounting standards are changing)
- Fleet management: Operating leases simplify fleet turnover — return the car at end of lease and get a new one
- Employee use: If employees use company cars privately, FBT applies regardless of ownership structure
Tracking business use: essential for both options
Whether you lease or buy, the ATO requires you to substantiate your business-use claims. A valid logbook (12 continuous weeks, valid for five years) establishes your business-use percentage. This percentage applies to depreciation, running costs, and GST credits.
Tripbook tracks every trip automatically with GPS. Classify each journey as business or personal, and export your exact business-use percentage at tax time. No manual logbooks, no guesswork.
Download Tripbook to build an ATO-compliant record of your business driving — whether your car is leased, financed, or fully owned.
