A Finance Lease is an agreement whereby the purchaser will purchase equipment of their choice in exchange for paying a regular series of rental payments. This is a great arrangement for people who want the flexibility of leasing yet they also want the opportunity to own the equipment or vehicle when the agreement ends.
Here are the steps you will need to take in order to get finance leasing:
- You start with selecting the equipment you need.
- You then have to negotiate a price for this equipment especially if you’re going to pay cash.
- The next step is to decide upon a term of the lease which can be from 1 to 5 years as well as the frequency of your payments.
- Then you will set a residual value for it, which in essence is an estimate of what the equipment will be worth once the lease ends, this needs to be calculated using the Australian Tax Office guidelines regarding depreciation.
- The financier will then purchase this equipment for you.
- You then pay the financier rentals.
Once the lease ends you have the option to either:
- Offer to purchase the equipment for its residual value, but the lease agreement will not outline your right to be able to purchase this equipment.
- You can return the equipment back to the financier who will then sell it at which point you will have to pay for any shortfall in the sales process if it does not go for the residual value earlier calculated.
- You can trade your old equipment for a new one.
Benefits of finance leasing:
- Does not require a loan establishment or approval fee.
- The rentals can be tax deductible if the equipment is being used to generate some taxable income.
- You use the equipment with no other capital outlay.
- You chose the supplier and also negotiate a price independently.
- You can arrange for direct debiting of the payments which save time and money.
- Equipment can be upgraded regularly.
- The revenue which is generated from the equipment can end up making it self financing.
- Monthly rentals are subject to a 10% GST, which can be claimed as tax input credit.