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’ve outlined 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?
Common Types of Leasing:
Operating Lease: Short-term leasing where the business uses the asset without owning it, typically for equipment with a limited lifespan.
Finance Lease: A longer-term agreement where the business pays for the asset's full value over the lease term, often with the option to purchase at the end.
Novated Lease: A vehicle lease for employees, where payments are deducted from their pre-tax salary as part of a salary packaging arrangement.
Equipment Lease: Tailored for businesses needing machinery, tools, or technology, spreading the cost over time.
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. This is 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/Maintained lease
A fully maintained operating lease offers an organisation the benefits of a hassle free method of vehicle usage. It is finance not shown on the balance sheet and in one monthly payment takes care of all costs associated with the vehicle i.e., all costs in relation to maintenance, insurance, finance are included. Once you decide on the motor vehicle required you simply decide on the length of the lease required and calculate how many kilometres you will travel in each year. Based on this the financier will calculate a monthly repayment. At the end of the lease term you hand the vehicle back to the lender with no residuals or balloon payments required.
Commercial hire 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. As such it is finance taken out by a business when they wish to purchase the goods.
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. It is accounted for on the balance sheet.
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.