Types of Leases

RENTAL

Sometimes known as an ‘Operating Lease’, Rental is best explained as “paying for the use of equipment owned by someone else”. In this case, the Financier, Broadway Leasing, is the owner.

As the equipment is not yours, it is not carried as an asset or a liability. It is “Off Balance Sheet Funding”. Let’s assume the equipment is for 100% business use, then your instalments are 100% tax deductible as an operating expense. Why would you rent? It’s best for assets which depreciate rapidly and generally need replacing or upgrading at the end of the term. Computers, Telephone Systems and most Office Equipment are well suited to Rental.

In the end, your payments are 100% tax deductible and you avoid being left with an obsolete piece of equipment. You can simply upgrade, purchase, continue renting at discounted instalments or hand the asset back.

CHATTEL MORTGAGE

Chattel Mortgages are essentially a Mortgage over the goods which are to be financed.  The goods remain under the ownership of the purchaser, and the financier takes an interest in the goods.

The owner of the goods can claim depreciation, running costs, fees and interest paid.  The full input tax credit from GST can be claimed by the purchaser.

They also give the ability to make an upfront deposit or end of term Residual payment to represent the good’s end value.  Alternatively, the purchase price can be amortised over the full term of finance. Following the final payment, the ownership of the goods is transferred to the purchaser.

CHP – COMMERCIAL HIRE PURCHASE

Also known as ‘Hire Purchase’, ‘Term Purchase’ or ‘CHP’ it is similar to a lease. The equipment is carried as an asset and the loan as a liability, in your Balance Sheet. Interest and Depreciation are then tax deductible. Ownership is granted upon the final payment.

NOVATION

A Deed of Novation is a three way agreement between an employee, employer and financier. It enables an employer to make ‘pre-tax’ payments of rentals as part of the employees salary package. Coupled with a rental agreement, the product is suited to Laptop Computers.

Basically, the employee gets to make their rental payments out of their Gross Salary (before tax), therefore reducing thier taxable income and in turn, reducing the amount of income tax paid. Novated Rentals on Laptop Computers do not attract FBT (Fringe Benefits Tax). This means an increase in Net Salary, at no cost to the employee.