A Finance Lease is a finance agreement which gives the lessee the use of property owned by the Financier (the lessor), for a stated period of time in return for regular payments (lease rentals) which are generally tax deductible.
The key feature of a lease is the separation of ownership and use of the leased asset. The lessor retains legal ownership of the assets receiving all lease rentals under the agreement and is entitled to the return of the assets that are subject to the lease. The lessee has the possession and right to use the assets for the term of the lease in consideration for which the lessee makes lease rentals to the lessor.
A Lease normally has provision for a predetermined residual value to be satisfied at the end of the lease term. At this stage, the lessee may wish to re-lease the goods or to satisfy their obligations with regards to the residual value.
This non-equity form of financing enables the lessee to free up cash resources from the purchase of assets for other uses. The rental nature of a lease also assists insulate a business from technological obsolescence.
Benefits of a Finance Lease
- Preserves the existing cash and credit facilities of the lessee's business. Funds can either be invested in more productive areas of their business, or maintained to take advantage of an unexpected business opportunity.
- Specific asset security. The lessee does not have to tie up additional business and/or personal assets.
- 100% financing of the value of the goods.
- Other costs associated with the lease can be financed on the contract such as Comprehensive Insurance, registration and on-road costs.
- Fixed cost contract. A fixed rate and term make for accurate budgeting and also provides a hedge against market fluctuations.
- Lease rentals can be specifically structured to suit the business cash flow.
- Lease rentals, and the associated costs of running the specific asset, are allowable tax deductions if the asset is used to generate assessable income.
- Finance Leases are off-balance sheet transactions and require minimal business administration.
- Residual value is predetermined.
Finance Lease vs Hire Purchase
The following comparison of features highlights some key differences between finance leasing and hire purchase:
Financier owns the equipment. The Lessee has no right to purchase either during or at the end of the term, although the financier will consider an offer to purchase for the residual value.
100% of the lease rentals are fully tax deductible provided the vehicle/equipment is used to generate assessable income.
100% financing. A Lease requires the full value of the goods to be financed.
Lease rentals are subject to duty and GST in most States and Territories.
The Lessee indemnifies the financier for the residual value of the vehicle/equipment.
Financier owns the equipment during the term of the agreement, with ownership automatically transferring to the Hirer when the final payment is made.
The interest component of the payments and depreciation on the vehicle/equipment are tax deductible provided the equipment is used to generate assessable income.
The Hirer may hire less than the full value of the goods. Deposits are optional and generally not required.
Payments and/or the agreement may be subject to duty. Goods are subject to GST.
The Hirer has the option to purchase the equipment at any time during the term of the agreement.
Laws and taxes applicable to these products are subject to change. Each customer should be advised to seek independent advice from their accountant or advisor when assessing these products.