With a Finance Lease, the lessor purchases the car or commercial vehicle on your behalf and then leases it back to your business in return for fixed monthly lease rentals. At the end of the lease you can either pay the final instalment (the "residual value") on the lease to take ownership of the car, trade it in or re-finance the residual and continue the lease; it's that simple.
A Finance Lease is suitable for companies, partnerships, sole traders and individuals where the leased vehicle is used for income producing purposes. It is also ideal for employees who want to salary package a vehicle through a Novated Lease as part of their remuneration.
The key feature of a lease is the separation of ownership and use of the leased asset. AFS, as lessor, retains legal ownership of the assets receiving all lease rentals under the agreement and is entitled to the return of the assets that are subject to the lease. Your business, as lessee, has the possession and right to use the assets for the term of the lease in consideration for which your business makes lease rentals to AFS.
GST is charged on the monthly lease rental and on the residual value at the end of the lease. Where your business is registered for GST, it can claim some or all of the GST contained in the lease rental and the residual value as an input credit on its next Business Activity Statement. Where the amount financed is below the depreciation limit your business can claim the lease rental as a tax deduction. Above the depreciation limit, interest charges on the lease and depreciation up to the value of the depreciation limit can be claimed.
A Lease normally has provision for a predetermined residual value to be satisfied at the end of the lease term. At this stage, you may wish to re-lease the goods or to satisfy your obligations with regards to the residual value.
This non-equity form of financing enables your business to free up cash resources from the purchase of assets for other uses. The rental nature of a lease also assists insulate a business from technological obsolescence.