Finance Lease Tax Bases

With a Finance Lease, the lender (the Lessor) purchases the asset that the customer (the Lessee) requires and then ‘leases’ it back to the customer.
At the end of the agreed lease period, the customer can return the asset. The asset will be sold at auction, or the lender may offer to sell the asset back to the customer.

Key points
• A tax-based lease is when the lessor purchases the asset that the lessee requires, and then ‘leases’ it back to them.
• At the end of the lease period the asset is returned to the lessor.
• The asset may then be sold at auction or sold back to the lessee.
• Upfront tax deductions may be available to a customer depending on their circumstances.

DETAIL
PurposeFinance for companies and business professionals who need motor vehicles, trucks, earth moving, agricultural, industrial plant or professional equipment.
TermMinimum of 12 months to a maximum of five years.
Minimum amount financed$7,500
Age of assetMotor vehicles – maximum age of eight years at end of loan.

Other equipment – age limit based on type of goods and intended use.

Please refer to your broker manager for more information around the other goods age.

InstalmentsThe instalment amount is fixed for the duration of the agreement.
Payment frequencyMonthly, quarterly, semi-annual, annual, seasonal or irregular.
Payment methodsThe preferred method is direct debit. Other options include periodical payment from a nominated account and BPAY®.
DepositCustomers cannot make a deposit on this type of contract.
Can insurance, fee and charges be financed?No. All fees and charges must be paid for upfront.
Balloon/residual valueA residual value is compulsory. The minimum residual is set in accordance with the ATO guidelines.

 

Client indemnityClient rightsTax deductions
The client indemnifies the lender for the residual value at the end of the lease term. If the client returns the asset to the lender for disposal in the market place and the net sale price is less than the agreed residual value, it is the client’s responsibility to make up the shortfall.

 

The client does not have any rights to purchase the asset. If the client does accept   the lender   offer and agrees to purchase the asset, the lender may consider financing the goods. Minimum amount financed is applicable and finance is subject to the lender acceptance criteria.Upfront tax deductions may be available to a client, depending on the client’s individual circumstances. Please refer to accounting professional for further advice.

Benefits to the client:
Preserves working capital—no deposit, 100 per cent finance is available to approved customers.
Easier management of cash flow—payment terms can be matched to income flows.
Will not tie up existing assets—the item being leased is normally sufficient security for the transaction.
The customer may be able to claim certain taxation benefit.

Client entitlementInput tax creditGST
The potential entitlement for an upfront tax deduction for prepayment of instalments is not available for medium to large enterprises (see ATO website).Under a finance lease, the lender is the purchaser and owner of the asset and hence is entitled to claim the Input Tax Credit (ITC). The amount financed on the asset will be net of the ITC claimed by the lenderGST is payable on the instalment payments over the life of the contract and the residual amount and is paid on all fees and charges. If the client holds an ABN, they may be able to claim any GST as an ITC.

 

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