Finance Lease

A Finance Lease is a finance arrangement where the financier purchases an asset on your behalf and leases it back to you for a fixed monthly rental over a specific term.

How does a Finance Lease work?

Under a Finance Lease, the financier purchases the asset and leases it to the customer (lessee) for a fixed monthly rental over a specified lease term. During the term of the lease agreement, the lessee pays the monthly rental to the financier and does not obtain ownership or equity in the vehicle. At the end of the lease, the lessee has the option of:

  1. Paying out the residual amount to obtain ownership of the asset; or
  2. Refinancing the residual amount; or
  3. Trading-in the asset with responsibility for the residual amount; or
  4. Returning the asset to the lessor with responsibility for any shortfall in the residual amount.

Benefits of a Finance Lease

  • Flexible lease terms (from 12 to 60 months)
  • Repayments are fixed over the term of the lease
  • Fixed interest rate
  • Lower interest rates apply as finance is secured against the asset
  • Option to make lease payments in advance for tax deduction or cash flow purposes
  • 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
  • Lower effective monthly payments for GST registered customers, as the financier claims back GST on asset purchase so you only finance the GST-exclusive price of the asset
  • The lease does not appear on the lessee’s Balance Sheet where the asset is under the Car Depreciation Limit

Is a Finance Lease suitable for me?

A Finance Lease is generally suitable for sole proprietors, partnerships and companies who are registered for GST and wish to claim back GST on a monthly basis without obtaining immediate ownership of the asset.

Individuals with majority business use of the asset may consider a Finance Lease; however generally a Chattel Mortgage or Commercial Hire Purchase (CHP) would be a more attractive option, as there would be no GST-related benefits for an individual under a Finance Lease. Alternatively, a Novated Finance Lease may be suitable and allow individuals to obtain a GST benefit from the lease arrangement, where the individual’s employer offers a salary packaging program.

Tax Implications of a Finance Lease

Under a Finance Lease, the vehicle is financed excluding the GST component of the acquisition price of the asset, which is claimed back by the financier. This means you are financing the GST-exclusive price, reducing the amount borrowed. However, GST is then charged on the monthly rental, which 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).

The asset does not appear on the lessee’s Balance Sheet where the asset is below the Car Depreciation Limit.

Make an Enquiry

To obtain more information about a Finance 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.