For businesses across Australia, leasing is a smart and flexible way to acquire essential assets like equipment, vehicles, and technology without the financial strain of outright ownership. However, not all leases are created equal, and understanding the nuances of each lease type is critical to making an informed decision that aligns with your financial strategy, operational needs, and long-term goals.
In this blog, we’ll break down the most common types of asset leases available in Australia’s financial services industry, explain their key features, and provide insights on how to choose the right lease for your business.
Leases are financial arrangements that allow businesses to use assets for a specific period in exchange for regular payments. The type of lease you choose will affect your accounting treatment, tax benefits, ownership options, and end-of-lease flexibility.
Here are the five main lease types commonly available to Australian businesses.
An operating lease is ideal for businesses that need short-term or medium-term access to an asset without the intention of ownership. The lessor retains ownership of the asset throughout the lease term and beyond.
• Ownership: The financier retains ownership; the lessee has usage rights.
• Accounting: Operating leases are classified as off-balance-sheet expenses, meaning the asset does not appear as a liability on your balance sheet.
• End-of-Lease Options: You can return the asset, renew the lease, or upgrade to a newer model.
• Tax Benefits: Lease payments are fully deductible as business expenses.*
• Businesses requiring flexibility and minimal upfront costs.
• Companies that frequently upgrade technology or equipment, such as IT firms.
Example: A retail business uses an operating lease to secure a point-of-sale (POS) system, ensuring they can upgrade to the latest technology every three years.
A finance lease is designed for businesses that plan to use an asset long-term and may want to own it at the end of the lease. This lease option provides the benefits of ownership without the need for a large upfront payment.
• Ownership: The financier retains ownership during the lease term, but the lessee has the option to purchase the asset by paying a residual value.
• Accounting: Both the asset and liability are recorded on the lessee’s balance sheet.
• End-of-Lease Options: Pay the residual value to own, refinance the lease, or return the asset.
• Tax Benefits: Payments may include depreciation and interest deductions.*
• Businesses that plan to own the asset eventually.
• Companies with long-term operational needs, such as construction firms.
Example: A logistics company uses a finance lease to acquire delivery trucks, planning to purchase the vehicles at the end of the lease term.
A novated lease is a specialized vehicle lease typically used as part of an employee salary package. It involves a three-way agreement between the employer, employee, and lessor.
• Ownership: The financier retains ownership, but the employee has full use of the asset.
• Accounting: Payments are made via salary packaging, reducing the employee’s taxable income.
• End-of-Lease Options: Employees can purchase the vehicle by paying a residual value or return it to the lessor.
• Tax Benefits: Salary packaging arrangements offer significant tax advantages.*
• Employees looking for a tax-efficient way to lease vehicles.
• Employers offering benefits to attract and retain talent.
Example: A Sydney-based tech company offers novated leases to employees as part of its benefits package, allowing staff to lease vehicles through pre-tax salary deductions.
A capital lease, similar to a finance lease, is structured to allow businesses to treat the leased asset as if it were purchased. Ownership typically transfers to the lessee at the end of the lease term.
• Ownership: The lessee gains ownership after the final payment.
• Accounting: The asset is recorded on the balance sheet as owned, with depreciation and interest expenses accounted for.
• End-of-Lease Options: Ownership transfer is typically automatic after the final payment.
• Tax Benefits: Includes depreciation and interest deductions.*
• Businesses seeking eventual ownership of long-term assets.
• Companies in industries where owning assets adds long-term value, such as manufacturing.
Example: A Melbourne-based manufacturing firm opts for a capital lease to acquire specialized machinery, ensuring it will own the equipment outright after the lease term.
A master lease agreement simplifies leasing for businesses that need multiple assets. It allows businesses to lease several assets under a single contract, with tailored terms for each.
• Ownership: Varies depending on the asset; often follows finance lease rules.
• Accounting: Accounting treatment is determined on an asset-by-asset basis.
• End-of-Lease Options: Options may include renewal, purchase, or return.
• Tax Benefits: Tax implications are asset-specific and depend on the terms of each lease.*
• Businesses requiring a variety of assets with a single, streamlined leasing structure.
• Companies expanding operations rapidly and needing flexibility in asset acquisition.
Example: A fast-growing logistics company uses a master lease agreement to acquire warehouse equipment, delivery trucks, and office technology under one contract.
The lease type you choose should align with your financial strategy, operational needs, and long-term goals. Here are the key factors to consider:
• Cash Flow Management: Determine whether your business can handle higher upfront costs (as in finance leases) or if lower monthly payments (as in operating leases) are more suitable.
• Balance Sheet Impact: Consider whether the lease type will affect your financial statements.
• Short-Term Use: Choose an operating lease for assets with a short useful life or those requiring frequent upgrades.
• Long-Term Use: Opt for a finance or capital lease if you plan to use the asset for most of its useful life.
• Consult your accountant to identify which lease offers the most tax advantages for your business.
4. Industry Requirements
• Technology-Driven Businesses: Operating leases work well for rapidly changing industries like IT.
• Capital-Intensive Industries: Finance and capital leases are ideal for acquiring long-term assets.
At DeMarque Finance, we specialise in tailored leasing solutions for Australian businesses. Whether you’re looking for an operating lease, finance lease, or master lease agreement, our team can help you navigate your options and choose the best fit for your business.
• Flexible lease terms to match your operational needs.
• Competitive rates for a range of industries.
• Expert guidance to ensure your leasing strategy aligns with your business goals.
Choosing the right lease type is a critical decision that can impact your business’s operations, finances, and growth potential. By understanding the key differences between lease options and consulting with financial professionals, you can ensure your lease strategy supports your long-term success.
Ready to explore your leasing options? Contact DeMarque Finance today to learn more about how our tailored leasing solutions can empower your business.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal, nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent. © DEMARQUE GROUP PTY LTD 2024. All rights reserved.
