Finance lease

A finance lease is an agreement whereby the financier owns the goods however you rent these goods from the financier. Finance lease agreements must have a residual or lump sum which represents the potential sale price of the goods at the end of the lease term.

At the end of the lease term the user must pay the residual amount which can be done by:

• Refinancing the lease;
• Offering to buy the asset, usually for the residual amount; or
• Trading in the asset on a replacement and paying any shortfall/retaining any profit.

In most cases, lessees can claim the full amount of the rentals as tax deductions, provided the goods are used predominantly to earn assessable income. The financier can claim the depreciation benefit associated with the equipment. This allows the financier to pass a lower rate to the user than would be available in an asset purchase arrangement. The higher the depreciation rate applicable to the asset, the lower the finance rate can be.

Up to thirteen monthly rental payments may be paid in advance and claimed as a tax deduction in the year of payment.

Lease rentals should not be structured to minimise tax as the Commissioner of Taxation has the right to refuse the claim if the guidelines are not met. Residual values must be in line with taxation guidelines.

Due to taxation rules, at the end of a lease agreement, the lessor cannot provide an option to purchase. However, it is common practice among lessors to accept an offer from the lessee to purchase the equipment for the residual value.

It should be noted that all residuals must be aligned to the strict ATO guidelines.