How Does A Lease Work?
A lease can also be referred to as a finance lease or asset lease. Under a lease agreement, the user (the lessee) pays the owner (the lessor – normally a bank or finance company) for the use of an asset (e.g. car), based on the GST exclusive price of the asset. The lessor registers an interest (also known as an encumbrance) in the asset to show others that they are using it as security for the lease.
Whilst you get the benefits of owning the lessor retains actual ownership of the asset. There is a residual value (balloon payment) at the end of the lease. This is an amount that is offset until the end of the term which has the effect of reducing your regular lease payments (rentals). The minimum residual value that you can set is a pre-determined percentage of the original amount financed which is set by the ATO. At the end of the lease term you can decide to pay the amount and keep the asset, re-finance the amount and start a new lease agreement or you can sell / trade in the asset and if the amount you get is greater than the residual value than you can use this equity towards a new asset or simply retain it.
GST is charged on the lease payment and the residual value at the end of the lease. If you are registered for GST, you can generally claim some or all of the GST contained in the lease rental and the residual value as an Input Tax Credit on your next Business Activity Statement.
You can generally claim the lease payments as tax deductions if the amount financed is below the depreciation limit. If the amount financed is above the depreciation limit then you can claim interest charges on the lease and depreciation, up to the value of the depreciation limit.
Who Does A Lease Suit?
A lease is suitable when the asset will be used predominantly (50%+) for business purposes. The product is mainly used by ABN holders – companies, sole traders, trusts and partnerships.
Lease – Pros
Potential Tax Benefits – Under a lease, GST is charged on the lease payment and the residual value at the end of the lease. If you are registered for GST, you can generally claim some or all of the GST contained in the lease rental and the residual value as an Input Tax Credit on your next Business Activity Statement. You can generally claim the lease payments as tax deductions if the amount financed is below the depreciation limit. If the amount financed is above the depreciation limit then you can claim interest charges on the lease and depreciation, up to the value of the depreciation limit.
No Capital Outlay – You can get the asset that you need for your business with zero or minimal outlay, so any capital that you do have can be used for other things.
Effective Cashflow – By financing the GST exclusive price and including a residual value (balloon payment) at the end of your lease this reduces your repayment and frees up more cash.
Inclusions – You can potentially include things like government fees, insurance premiums and accessories as part of your lease, so one repayment covers all of your costs.
Lease – Cons
Security – Although using your asset as security can help to get you a lower interest rate it also means that if you don’t make your agreed payments you risk the asset being repossessed.
Personal Use – If you’re using the vehicle for predominantly personal purposes then a lease agreement is not the most effective option for you.
Asset Only – With a lease, the amount that you finance can only be used for the purpose of leasing the asset. You can’t split the funds and use part of the asset and part for something else.
