Leasing Explained – Types of Leases

Which product is right for me?

Trying to figure out which finance product is right for you can be confusing. In fact, we recommend discussing your situation with your tax professional. However, to simplify your decision process we outline the choices available to you here.

Lease products fall into two categories as either a finance lease or operating lease. They differ in the way they treat ownership, disposal and residual risk on the vehicle. Hire purchase options are available and function in a similar fashion to a loan to purchase an asset.

In order to decide on the most appropriate type of finance you first need to consider the following:-

• Do you wish to own the asset at the end of the lease period?
• Do you use the asset for business purposes more than 50% of the time?
• Are you looking to finance the vehicle only, or do you also want a range of fleet management services?
• How long do you intend to keep the vehicle and how many kilometres will you travel?
• Do you want or need to show the asset on the company balance sheet?

Please contact us and we can discuss the options available to you!

What are the different forms of finance available to me?

Commercial hire purchase (asset purchase)
Finance lease
Operating lease (rental)
Novated lease (salary packaging)
Chattel mortgage

Commercial hire purchase (asset purchase)

Commercial hire purchase (CHP) is an agreement between the purchaser and the financier whereby the financier owns the vehicle or equipment during the hiring period. It differs from a finance lease in that the goods automatically become yours once all terms of the agreement have been completed – usually when the final instalment is paid.

A CHP can be arranged with or without a final balloon payment at the end of the term depending on what your budgetary requirements are. The repayments are fixed for the term of the CHP. An upfront deposit or trade-in, which will reduce your rental commitments, is optional. Accounted for on the balance sheet.

Finance lease

A finance lease is a form of rental agreement under which you lease an asset for an agreed period and rental. A residual value is set upfront to reflect the asset’s value at the end of the term. Accounted for on the balance sheet.

Under the conditions of most finance leases you have no option or right to purchase the asset. However it is common practice that most financiers will consider an offer from you to purchase the asset at the end of the term for the residual value. Alternately, you may trade it in on a replacement, return it to the financier paying the difference between the residual and market value (residual risk) or even extend the lease for a further term.

Operating lease (rental)

An operating lease is similar to a finance lease. The difference being that under an operating lease you have no exposure to the residual value risk i.e., the difference between the residual value and the market value of the asset. At the end of the term you must return the asset to the financier. It is an ideal product for equipment that needs regular updates. Accounted for off balance sheet.

Novated lease (salary packaging)

It is an agreement between an employee, the employer and the financier. The lease is taken out in the name of the employee and the employer agrees to take on the repayment responsibilities for the duration of the employee’s employment. It is not recorded on the balance sheet of the employer.

If the employee leaves this employer, the lease may be transferable to a new employer or the employee can take on the responsibility of the repayments. The original employer no longer has any financial responsibility and is not left with a vehicle they do not require.

The benefit to the employee may be the reduction of tax as a result of having the repayments made out of pre-tax dollars. There may be fringe benefits tax consequences (based on the vehicle value and kilometres travelled) as a result of the transaction between the employee and the employer, so advice from your tax professional is recommended. Similar to a finance lease, residual risk rests with the employee.

Chattel mortgage

Similar arrangement to a hire purchase but with specific GST benefits, which in certain circumstances will allow the entire GST proportion, be claimed in the first BAS period after purchase. Loan structure can be tailored in a similar fashion to a CHP or finance lease.

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