A Finance Lease is a rental agreement where we arrange the purchase of the business equipment, truck, excavator or vehicle etc for you via a lender. Then you rent it from the lender at fixed monthly repayment over an agreed period. You might have also heard it called a lease or equipment lease.
There is always a residual value at the end of the term, and most financiers will allow you to release the asset at the end or they will offer to sell the equipment to the client for the residual amount. The equipment must be used predominately for business use, terms generally range from 12 to 60 months, and the interest rate is fixed for the term.
What sorts of business equipment does Finance lease best suit?
- Cars
- Trucks and other heavy vehicles
- Office equipment
- Forklifts and other industrial equipment
- Medical equipment
- Printing equipment
- Construction equipment and more
- Industrial equipment
- Earthmoving equipment
Ownership under Finance Lease
The financier owns the equipment until the final payment, including any residual, is paid. The ownership is then transferred to the Lessee.
Residuals on Finance Lease
There is always a residual value, which is owed to the financier at the end of the term. It is often calculated as a percentage of the original purchase price.
Accounting under Finance Lease
The purchase price under a finance lease is treated as a capital purchase and depreciated over the life of the asset. The interest cost is also treated as an expense. GST is payable with each instalment. Normally lease payments are treated as deductible expenses for businesses.*
*Please refer to your Accountant or Advisor for Tax Advice.
Accounting for a Finance Lease on the Balance Sheet
Both the asset and liability are shown on the balance sheet under a Finance Lease.
Upgrades and Add Ons
Upgrades and add ons generally require another lease and/or payout of the old lease – a penalty may be incurred for this if the residual is not due.
Benefits of a Finance Lease
- Keep your capital – we pay 100% of the equipment purchase price up front so you don’t tie up your own funds
- Payments are 100% tax deductable if for business use
- Depending on your financial position you may have the option to prepay 12 months of payments to reduce your taxable position in a financial year*
- Easy budgeting with fixed rental payments over the period of the contract
- Short term contracts usually up to 5 years but can be extended to 7 years
- You claim the GST back on your monthly payments
*Please refer to your Accountant or Advisor for Tax Advice.