Each type has a different structure providing different benefits to the borrower. The type of financing selected would depend on the individual or company's' unique requirements.

It is important to understand the how each type works and the benefits and disadvantages are.

Leasing:

Leasing Agreements is essentially an agreement with the owner of the goods whom purchases the equipment on your behalf and agrees to rent it to you for a specified number of months, usually to to a maximum of five years (60 months). As the Hirer you are able to claim each payment as a tax deduction, however as you are NOT the owner of the goods, you are not able to claim depreciation expenses. This remains with the owner of the goods, usually the financier. Most leasing contracts usually have a residual payment to discharge the financial obligations under the Lease contract. This residual value is usually set at what the forecast written down and depreciated value of the leased goods are expected to be worth on conclusion of the financing agreement. Depending upon the type of goods being purchased, leasing can be a very tax effective option to write down the value of the equipment which have a very low depreciation rate (Set by the Australian Tax Office) however, the actual salvage value is substantially lower than what the Tax Office has decreed for the proposed given term. An example of this is Shop Fittings, which when removed will most likely have a salvageable value of zero, yet the Tax office will only allowed you to write off 50% say over a five year period. The financier may have allowed you in this example to write the residual down to 5% which is more in line with the salvage value. In this instance, the financier will "load" their rate to compensate for the "loss" in tax deductibility , however, when analysed the financial benefit far outweighs the marginal cost increase.

Remember, that should you purchase any equipment for a value (Residual Value) which is in excess of the salvage value written into the lease finance contract that you maybe liable for Capital Gains Tax. You are encouraged to obtain independent advice from your taxation consultants.

Another area which Leasing plays a part is luxury motor vehicles. There is a tax threshold which once the price of a vehicle exceeds, any depreciation from that point is disallowed, For example, the Luxury Tax Threshold is $62,000.00, which means as long as the vehicle is under that figure, the vehicle for tax purposes can be depreciated from that amount 100%. However, if the vehicle is worth $100,000.00 then the threshold prevents the owner from claiming the depreciation on the balance of 38,000.00 which at 22.5% per annum Diminishing Value Method is quite substantial. In this case leasing can be a good option to allow the purchaser to maximise their tax benefits, however, the residual value of the vehicle needs to be in line with the expected salvage value at the conclusion of the agreement.

Remember with a Lease Agreement, you are NOT the owner of the goods, and you do not BENEFICIALLY have a right to the goods upon conclusion of the agreement, although the accepted practice is for the hirer to be given the option to purchase the goods for the agreed residual value.

Novated Lease:

Essentially the same as Leasing above, however is usually incorporated into an employee's salary package where pre-tax income is used to pay for the vehicle. Especially advantageous for a salary earner in a high tax bracket who needs a vehicle in their line of work. It should be noted, that even though the employer pays for the vehicle payments, the lessee (borrower) is still financially liable for the finance contract. Should the borrower leave the employ of the company the vehicle goes with them, and is NOT the responsibility of the former employer.

Operating Leases:

Sometimes referred to as Fully Maintained Leases, which where the financier as owner of the goods also fully maintains, insures and services the equipment, all included in the monthly rental fee. Again usually found with Motor Vehicles, however, hirer's need to be mindful of the terms and conditions such as excess mileage which can penalise the exit from a contract. Many companies use this method of financing as a method of budgeting accurately their costs on a monthly basis. The only consumable item the client is expected to pay is for the fuel.

(Commercial) Hire Purchase:

This is different structure, where ownership of the equipment and goods vests jointly with the purchaser and the financier. Security is taken by way of a charge over the goods, and the owner then pays off the loan in accordance with the loan agreement. As the title will ultimately vest with the owner, in a business situation, the owner can claim the depreciation, interest on the finance facility, and it does not have matter what the the balloon payment (Residual) is at the end of the contract, as the written down value of the equipment is what it is. When the final payment has been made, then full title is released by the financier to the owner and the title becomes unencumbered. Where GST has been paid on the goods, the monthly payments will have a GST component which can be claimed as a credit

Chattel Mortgage:

Again a different structure. Essentially, it is a business loan usually to a corporate entity where a Specific Debenture Charge is taken over the corporation's assets ( the goods being purchased). Under this structure, 100% of the GST paid for the purchase of the goods can be claimed back at the next GST return. However, NO GST can be claimed on the monthly payments. The Chattel Mortgage can have a balloon payment or can be a straight loan contract, which ever suits the borrower. Again, as with Hire Purchase, the depreciation scenario remains the same. Upon full payment of the loan, the financier will release the Registered Debenture Charge held over the company thus removing any encumbrance.

Master Equipment Agreements:

Essentially another name for a Line of Credit for the use of purchasing equipment under either Lease Contracts or Hire Purchase Contracts. Particularly useful for businesses which have a high turn over of equipment. The borrowing entity arranges a credit limit for a pre-determined amount, and the company can then purchase the equipment required and just have the supplier hand the invoice to the financier for payment. Should there be a trade in involved, and surplus funds go back to the financier to keep the balance as low as possible to reduce interest payable under the facility and also to main an equity position to allow for future purchases.

Rental Agreements:

Rental agreements are similar to that of a Lease Agreement, except that usually no residual value is calculated or allowed for. Usually used for smaller capital items such as telephone systems, computers etc which have a limited business life where at the expiration of the agreement, the equipment is retrieved and replaced with new technology. The hirer does have the option to purchase the equipment (buy out the contract) if they wish . The rental payments are 100% tax deductible for those items which are being used in a business for the production of taxable income.

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