How does a Finance Lease work?
The financier purchases the asset on behalf of the customer, who then leases it back from the financier and pays a fixed monthly rental for the term of the lease. At the end of the lease, the customer can either pay a residual value (final instalment) and take ownership of the car, trade it in or re-finance the residual and continue the lease.
Benefits of a Finance Lease
- Flexible contract terms ranging from 12 to 84 months.
- Fixed interest rate.
- Fixed monthly lease rentals.
- Costs are known in advance.
- A residual is applied to the lease based on the ATO life expectancy of the asset.
- Tax deductions are applicable when the asset is used for business.
- As GST contained in the car’s purchase price is claimed by the financier, only the asset’s price exclusive of GST is financed, lowering monthly payments.
- Ability to make advance lease payments for tax deduction or cash-flow purposes.
Who does a Finance Lease suit?
Finance Leasing is suitable for companies, partnerships, sole traders and individuals where the leased asset is used for income producing purposes.
Tax implications of a Finance Lease
GST is charged on the monthly lease rental and on the residual value at the end of the lease (where the customer is registered for GST).
Residual Value (RV) of a Finance Lease
Residual Value on equipment under a Finance Lease needs to be in line with Tax Guidelines, and is based on the effective life of an asset as stipulated by the ATO.