Operating lease
An operating lease is a pure rental agreement, with no documented residual although the financier may decide to take the risk of covering the residual. The goods may be returned to the financier when the agreement expires.
How does an operating lease work?
Operating leases are usually written for terms significantly less than the useful life of the equipment, therefore the financier should be in a position to sell at a profit or extend the lease at the same monthly repayment. The outstanding debt to the financier is reduced so the effective interest rate for the extended period is far higher than the original term. These extended lease rentals are referred to as "Inertia Rentals".
Operating lease commitments need only be disclosed by way of a footnote to the published accounts. Under an operating lease agreement, should the asset be sold for less than the residual value, the user cannot be held liable. The financier must therefore have a high degree of confidence in the predicted resale value to ensure no loss is experienced.
If an operating lease portfolio is well managed, profits may be made from the sale of Inertia Rentals assets. Operating leases are generally limited to motor vehicles, computers and multi purpose industrial equipment such as forklifts, as these have sizeable second hand markets and a reasonable estimate of future value can be made.
What are the benefits of an operating lease?
- Terms range from 12 to 60 months
- Fixed interest rate for the term of the lease
- Fixed repayments for the term of the lease
- Goods and Services Tax (GST) on the purchase price of the vehicle is claimed back by the finance provider. This lowers the amount financed to the purchase price minus GST
- Subject to credit approval, our lease providers must offer finance for 100% of the purchase price
- You can choose a vehicle that best suits your needs
- It may be possible to drive your new car within 72 hours
Who should consider an operating lease?
An operating lease is suitable for small ticket items such as office equipment.
What are the tax implications of an operating lease?
Goods and Services Tax (GST) is charged on the monthly lease payment and as long as the employer is registered for GST, they can claim this back on their Business Activity Statement (BAS). GST is also charged on the residual value on the lease, and as the novation reverts back to the employee at the end of the lease, the employee is responsible for paying the GST on the residual.
Fringe Benefits Tax (FBT) is payable on the vehicle, and this expense is ordinarily passed on to the employee. The amount of FBT depends on the kilometres travelled each year or the amount of business use.
The higher the kilometres and business use, the lower the FBT. Where the amount financed is below the depreciation limit of $57,180, the employer claims the operating lease payment as a business expense. Above the depreciation limit, they claim the interest charges and depreciation up to the value of the depreciation limit.
It should be noted that all residuals must be aligned to the strict ATO guidelines.