What Is a Finance Lease or Car Lease?

A Finance Lease or Car Lease is a financial instrument that allows the borrower of the funds (the client) to enjoy the benefits and use of the vehicle, whilst the ownership of the asset remains the title of the finance corporation.

The Financial Mechanics of the Car Lease

The financier acquires the vehicle on behalf of the client and then on-leases the vehicle to the client in return for a fixed monthly lease rental for the term period of the lease. At the expiry of the lease period, the client generally has an option to either pay a final residual balloon value and take ownership of the vehicle, or alternatively may use the vehicle as a means of trade-in or extend the lease by re-financing the residual value.

Advantages of the Car Lease

• Fixed repayment structure is known at inception, that is - there are fixed terms that can range from two years (24 months) to five years (60 months); fixed interest rate; fixed monthly rentals and a fixed final residual value.
• The GST component in the vehicle’s purchase price allows the financier to claim the GST input tax credits, therefore funding to the client is only on the GST exclusive purchase price of the vehicle. Hence, by financing a lower amount, means lower monthly repayments.
• The Lease can be structured to make advanced payments during the term period to assist in timing issues that may result in increased tax deductibility and/or help with cash flow constraints.

Car Lease may be suitable for:

• Companies, Partnerships, Sole Traders and Business Professionals, where the vehicle is essentially used for income producing purposes.
• Employees and Personnel of corporations and business entities who desire a vehicle in their salary package as a novated lease.

Points to note and consider:

• The fixed monthly lease rental and residual balloon value will incur a GST charge. If the client is registered for GST, then the GST amounts can be claimed back on lodgement of their Business Activity Statement (BAS).
• The total amount financed for the car lease, which form part of the monthly lease rentals may be claimed as a tax deduction, subject to Depreciation Cost limits. If the total amount financed is below the Depreciation Cost Limit, the full lease rental is available as a tax deduction. Should the amount financed exceed the Depreciation Cost Limit, lease charges as a tax deduction would be limited to the Depreciation Cost Limit.