An Operating Lease is a finance arrangement where the lessee agrees to lease the motor vehicle for
a predetermined period, and then the vehicle is handed back to the leasing company at the end of the term.
How does an Operating Lease work?
Under an Operating Lease, the financier purchases the motor vehicle and leases it to the customer (lessee)
for a fixed monthly rental over a specified lease term. At the end of the lease term, no residual is payable
by the lessee and the vehicle is handed back to the leasing company who assumes the residual value risk of
The Operating Lease agreement will provide a maximum number of kilometres that can be travelled by the motor
vehicle during the lease term. If the maximum number of kilometres is exceeded by the lessee, an excess
kilometre charge will be payable by the lessee to the leasing company.
The motor vehicle must be returned to the leasing company at the end of the lease in good order and condition.
Depending on the type of repairs to be made to the motor vehicle upon return (if any), the lessee may be required
to pay the cost of those repairs.
The lessee has the option of choosing a Non-Maintained or Fully-Maintained Operating Lease.
Non-Maintained Operating Lease
Under a Non-Maintained Operating Lease, vehicle maintenance and running costs are not included in the monthly lease rental.
Therefore, the lessee is responsible for paying and administering all maintenance and other running costs of the motor vehicle.
Fully-Maintained Operating Lease
A Fully-Maintained Operating Lease is an arrangement where all of the operating costs (such as lease rental, servicing and
maintenance, registration and tyres) of the motor vehicle are covered by a single monthly payment made by the lessee to
the leasing company. The leasing company takes care of all maintenance and administration costs of the motor vehicle
throughout the lease term.
Benefits of an Operating Lease
- Flexible lease terms (from 12 to 60 months)
- The rental payments are fixed over the term of the lease
- Option to include running costs in a single monthly payment
- The financier assumes the residual value risk on the vehicle, so the total cost of ownership is known at the
commencement of the lease
- The monthly rental is 100% tax deductible when the asset it used solely for business-related purposes
(limited to the Car Depreciation Limit where the asset is a car)
- GST registered customers can claim back the GST component of the monthly rental
- The lease does not appear on the lessee’s Balance Sheet
Is an Operating Lease suitable for me?
An Operating Lease is generally suitable for companies who do not wish to take ownership or residual risk of the
motor vehicle. Operating leases are generally more expensive than other finance solutions due to the inclusion of
a ‘premium’ for the removal of residual risk.
Companies that wish to build equity in the asset or assume residual risk could consider alternative
finance arrangements such as a Finance Lease,
Chattel Mortgage or
Commercial Hire Purchase (CHP).
Tax Implications of an Operating Lease
Under an Operating Lease, GST is charged on the monthly rental and can be claimed back on the entity’s next Business
Activity Statement over the term of the lease contract (where the customer is GST registered).
Where the asset is solely used for business-related purposes, the monthly lease rental is 100% tax deductible for the
lessee. However, where the asset is a vehicle that exceeds the Car Depreciation Limit, then a tax deduction can be
claimed for asset depreciation and interest charges on the finance contract (instead of the monthly lease rentals).
Under an Operating lease, the asset does not appear on the lessee’s Balance Sheet.
Make an Enquiry
To obtain more information about an Operating Lease and whether it would be suitable for you, please contact Southgate on
1300 132 700 or enquire online.
Disclaimer: We recommend that prior to entering any finance arrangement that you seek independent financial advice.
The information contained herein is of a general nature only and does not take into account your personal
circumstances. Southgate Financial Services Pty Ltd, its agents, employees and lenders accept no responsibility
for any loss that may arise.