Finance Lease

If you're considering a finance lease to buy tools, vehicles, or equipment – think Savvy and rest easy!

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, updated on August 29th, 2023       

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If your business is looking to lease a vehicle, equipment or other plant, it’s worth considering your options when it comes to finance leases. This type of lease is popular with large and small businesses all across Australia and can help you access the asset you need to keep everything running smoothly.

Savvy can help you find the best finance deal for your situation. Simply apply with us and you’ll be placed in the capable hands of one of our experienced consultants, who will find you the most affordable and suitable deal for your business throughout our panel of finance partners. Apply today and have your lease sorted before you know it.

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What is a finance lease?

Finance leases work by providing a cash flow-friendly way to use assets. When you enter into a finance lease agreement, you specify or choose the vehicle, plant or equipment you want to use and the financier buys the asset. You get the use of that asset for an agreed term in exchange for regular payments. Many Australian businesses choose this method to purchase assets because terms are flexible and finance lease payments are always fixed.

This type of finance is different in several key ways to operating leases. Firstly, you’re given the option to buy when the lease term ends, unlike with an operating lease where you simply hand the vehicle or asset back at the conclusion of your agreement. This is done through the presence of a residual payment, or balloon payment, which you’re required to pay at the conclusion of the lease. You can do this either by paying it and taking ownership of the asset, selling or trading in the asset and using the sale funds to cover it or refinancing the residual and extending the length of the lease.

Finance leases are less expensive than operating leases, as you’ll be required to organise and pay all maintenance and other on-road costs yourself. Lessors offering operating leases include these costs in the repayment, meaning the business owner won’t be required to source their own insurance and other charges. The benefit of this for finance lessees is that they can do their own research and select from the most suitable and affordable options, rather than defaulting to what the lessor provides them.

Why do Australian businesses use finance leases?

Whichever option you choose at the end of a finance lease, the benefit remains the same – you get access to high-quality equipment or vehicles without the capital outlay required to buy them outright.

  • The structure of the regular lease payments serves to spread the cost over a period of up to five years.
  • The residual amount further protects your cash flow because it reduces the amount of those regular payments.
  • The flexibility in a finance lease has plenty to do with providing options when you can’t do without an asset – both in terms of your capital and equipment needs.
  • It’s a more manageable way to get access to machinery or vehicles at the start of your agreement, because it distributes the cost burden over several years, if necessary.

What about GST and a finance lease?

When the lessor purchases the asset at the start of a finance lease, they pay the GST, so they're entitled to claim it back. The good news regarding that is they then lease the asset to you, GST-free. As a GST-registered business, you're still entitled to claim back the GST on regular lease payments. If you decide to purchase the vehicle at the end of the finance lease term, the lessor will charge GST on the price, and you can also claim that back when your next BAS is due.

Questions about commercial finance leasing

Who owns the asset during a finance lease agreement?

The lessor (the financier leasing you the asset) owns the vehicle or equipment for the finance lease term's entire duration.

When wouldn't I use a finance lease?

You might opt to use a commercial operating lease to buy equipment or a vehicle if you didn't plan on using the asset for a long time or if you wanted to upgrade regularly. That's because an operating lease typically runs for a shorter term (one or two years), and you're not obliged to buy or pay a residual when the agreement ends.

If I can't claim finance lease payments as tax-deductible, what can I do?

In that case, you can still claim the interest portion of your payments. Finance lease payments work on an amortising scale – which means at the start of the lease, you owe more money, and a larger proportion of that gets formed from interest. As the agreement progresses and you owe less, the portion of interest is lower. That results in you claiming more tax at the start of the contract than at the end. That doesn't change each payment's total value as your agreement progresses – that gets calculated at the beginning of the term and doesn't change.

What’s the difference between a finance lease and a novated lease?

A novated lease is another type of lease agreement whereby your employer manages the payments of the lease and deducts them from your pre-tax salary, meaning you’ll save on income tax as a result. Like operating leases, novated leasing payments include all on-road costs, so you won’t have to worry about organising them yourself, but these arrangements can be taken out by anyone, not just business owners. If you’re looking to take out a novated lease, you can speak with a Savvy consultant about your options today.

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