What is a Finance Lease?
A Finance Lease is typically where a client leases a piece of equipment and the financier or lessor transfers the risk of ownership to the customer without transferring legal ownership. The lessee makes fixed interest repayments over the term of the lease and then takes ownership at the end by paying and agreed amount. This amount usually mirrors the set residual or balloon value. Ownership is never passed to the customer until the financier or lessor accepts the final repayment as an agreed purchase.
Residual values are typically set by the Australian Tax Office and have a minimum and maximum for each lease term, customers can specify their actual residual value within this range.
At the end of the finance lease, the customer may choose to extend the lease for an additional term; refinance the residual value or offer to purchase as mentioned above. This is all subject to agreement from the financier or lessor.
Tax and GST:
Tax and GST benefits will vary depending on the type of arrangements the finance lease is under. In some case such as novated leasing there may be additional benefits for passing the lease onto employees (salary packaging). Generally for lessee’s tax benefits include the ability to claim 100% of the business use as a business cost but similarly to an operating lease there is no depreciation that can be claimed. GST is charged on the monthly lease rental and the residual value and can be claimed as an Input Tax Credit if used for business purposes.
Cost of Finance:
Similarly to an operating lease they are usually a little more expensive than traditional forms of finance. Recent times have seen this gap contract significantly.