Written by A finance lease is a type of leasing arrangement between a business and a leasing company that effectively allows you to rent an asset for a set period. Let’s take a look at how they work:
- Select the vehicle or asset you want to lease
- Decide on the lease term you want (between one and five years)
- Determine whether you want to include your car’s on-road costs in the payments (fully-maintained) or leave them out (non-maintained, which is the more common option for these leases)
- Agree a residual value with your leasing company
- Receive your vehicle or asset and start making your lease payments on a weekly, fortnightly or monthly basis
- Pay the residual to conclude your lease agreement
What happens at the end of my finance lease?
As mentioned above, finance leases come with a residual payment at the end of the term. You’re required to cover the cost of this residual as part of the agreement, which you can do in several different ways:
- Pay the residual out of pocket and take full ownership of the asset
- Sell or trade in the asset to cover the residual and end the lease
- Sell or trade in the asset to cover the residual and start a new lease with a different asset
- Refinance the residual and continue leasing the same asset with an extended term
Under a finance lease, the risk of obsolescence falls to the lessee, being your business. This means it’s your responsibility to look after the car, as you’ll have to buy or sell it at the end of the agreement.
What can I use a finance lease for?
There’s a wide range of assets, namely vehicles and equipment, that you can lease with one of these deals. Here’s a selection of what you may be able to lease:
- Cars
- Trucks
- Vans
- Utes
- Motorcycles
- Buses
- Forklifts
- Cranes
- Diggers
- Tractors
- Heavy machinery
- IT equipment
- Medical equipment
- Factory assets
How are finance leases different from operating and novated leases?
Finance leases aren’t the only option you’ll come across in your travels. There are two others that are important to consider, which are operating and novated leases. We’ve broken down how each option works here in this table:
| Operating lease | Finance lease | Novated lease | |
|---|---|---|---|
| Suitable for? | Businesses and business owners | Businesses and business owners | Employees or business owners paying themselves a salary |
| Usage? | At least 51% commercial | At least 51% commercial | No usage restrictions |
| Assets available? | Cars and certain road vehicles | Commercial and non-commercial vehicles and equipment | Cars with payloads under 1,000kg that seat nine or fewer |
| Payments made by? | The business | The business | The employer, through pre-tax deductions from the employee’s salary |
| Ownership? | Rests with the lessor at all times | Rests with the lessor until residual is paid, after which it’s transferred to the lessee | Rests with the lessor until residual is paid, after which it’s transferred to the lessee |
| Term length? | One to five years | One to five years | One to five years |
| Options at the end of the lease? | Return the vehicle to the lessor | Pay the residual and buy the car Sell or trade in the car to cover the residual Refinance the residual and extend the lease | Pay the residual and buy the car Sell or trade in the car to cover the residual Refinance the residual and extend the lease |
| On-road costs included? | Optional | Optional | Optional |
| Tax benefits? | Up to 100% of lease payment claimable (subject to asset usage) GST claimable on asset purchase and all included expenses | Up to 100% of lease payment claimable (subject to asset usage) GST claimable on asset purchase and all included expenses | Reduction of income tax through salary sacrificing GST claimable on car purchase by lessor |
Note: tax benefits may differ between businesses, so it's important to speak with a professional if you're unsure about what you can and can't claim.
Are my lease payments tax-deductible?
As mentioned above, you may be able to claim up to 100% of your finance lease payments as a tax deduction. However, the amount you’re able to claim will ultimately come down to how much you use your asset for commercial purposes.
For example, if you’ve decided to lease a sedan for your small business that you can also use to ferry the kids to and from school, that may only end up at a commercial usage of 65%. In this case, you’d only be able to claim up to 65% of your payment and any other claimable expenses, such as GST.
If you aren’t 100% sure about what you can and can’t claim as part of your lease agreement, you should speak with your accountant or a tax professional.
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Frequently asked leasing questions
What on-road costs can be included in my finance lease payments?
If you decide to go for a fully-maintained lease, here are some of the costs you could include in your payments:
- Comprehensive insurance
- Fuel
- Roadside assistance
- Servicing and maintenance
- Tyre replacement
- Vehicle registration
If you want to know more about your on-road cost inclusions, you can speak with a member of our experienced consultant team to find out more after you get a quote with us.
If I bought my asset with a business loan, would my repayments be tax-deductible?
No – if you decided to purchase your business asset instead, the repayments on a chattel mortgage or business loan wouldn’t be entirely tax-deductible. Instead, the interest you paid would be (subject to the usage of the asset), as would the GST on the purchase price and the asset’s depreciation over time. These arrangements would also mean your business would own it from the start.
How much will my lease cost?
There’s a variety of factors that can impact the cost of your lease, such as:
- The value of the asset you’re leasing
- The length of your leasing term
- Your lease provider’s interest rates and fees
- Whether you opt for a fully-maintained or non-maintained lease
Who are the lessor and lessee for my business’ lease?
In a leasing agreement, the company offering the vehicle and leasing it out is the lessor, while the business or self-employed individual using it and making the payments is the lessee. In other words, you’re the lessee, making payments to the lessor.
What should I do if I want to change over my leased assets regularly?
Many businesses dealing with frequent changing over of leased vehicles and equipment choose operating leases, as there’s no requirement to pay a residual or dispose of the asset. However, you can still do this with a finance lease, though the residual means there’ll be more admin involved in this process.
How long will it take to get my lease agreement approved and signed off?
When you apply with Savvy, we can help you have your lease sorted in as little as 48 hours, from application to approval. You can get the ball rolling on your lease with us today!
