Choosing the Best Solution
Benefits and Characteristics of Finance Options
Finance Products Compared
Benefits | Characteristics | Rental | Operating Lease | Finance Lease | Hire Purchase | Chattel Mortgage |
Value that can be financed | Total value of the equipment should be financed. | Total value of the equipment should be financed. | Deposit can be paid, but not mandatory. An amount up to 100% can be financed | Deposit can be paid, but not mandatory. An amount up to 100% can be financed |
Accounting treatment | Liability NOT on customer’s balance sheet if complies with accounting standards | Liability on customer’s balance sheet | Liability on customer’s balance sheet | Liability on customer’s balance sheet |
Interest | Not claimed by customer. | Not usually claimed by customer (see below) | Claimed by customer | Claimed by Customer. |
Title/Depreciation | Title with Lender. Depreciation available to Lender. | Title with Lender. Depreciation available to Lender. | Complex, but rights of title with Hirer (Customer). Tax deduction for Hirer | Title with borrower. Tax deduction for Borrower (Customer). Goods mortgaged to financier. |
Tax effect for user | Payments may be deductible for Lessee (Customer) to the extent the asset is used in producing assessable income. | Ask for professional advice. Payments may be deductible for Lessee (Customer) to the extent the asset is used in producing assessable income. Alternatively, interest and depreciation may be claimed instead. | Hirer claims tax deduction for interest on contract plus depreciation of asset to the extent the asset is used in producing assessable income | Borrower claims deduction for interest on the loan plus depreciation of the asset to the extent the asset is used in producing assessable income |
Residual/Balloon | There is no disclosed residual or balloon. | Residual is mandatory and is an estimate of value at end of term Lessee indemnifies the Lender (Lessor) for residual. | Balloon payment is optional | Balloon payment is optional |
Payments regime for larger transactions, eg. more than $250,000 | Payments may be in advance or arrears. Rate fixed for the term of the contract. Monthly quarterly and seasonal available. | Payments may be in advance or arrears. Rate fixed for the term of the contract. Monthly quarterly and seasonal available. | Payments may be in advance or arrears. Rate fixed for the term of the contract Monthly quarterly and seasonal available. | Payments may be in advance or arrears. Rate fixed for the term of the contract. Monthly quarterly and seasonal available. |
Benefits | Characteristics | Rental | Operating Lease | Finance Lease | Hire Purchase | Chattel Mortgage |
Payments regime for smaller to medium transactions eg. less than $250,000 | Fixed, floating, capped, range or any combination | Fixed, floating, capped, range or any combination | Fixed, floating, capped, range or any combination | Fixed, floating, capped, range or any combination |
GST Issues and Input Tax Credits (ITC) | Lender purchases equipment and claims an ITC. Repayments are calculated on the GST exclusive price. | Lender purchases equipment and claims an ITC. Repayments are calculated on the GST exclusive price. | Liability to GST arises at the time of supply of equipment. The GST amount can be paid up front, funded or paid as well as the repayment that coincides with the Hirer’s ITC claim. | Borrower acquires goods directly from the supplier and claims ITC as per a normal purchase. |
GST payments | GST is added to the amount paid by the lessee for the rentals, residual and any purchase of the asset. Lessee/Borrower can generally claim any GST paid as an ITC | GST is added to the amount paid by the lessee for the Lease payments, residual and any purchase of the asset. Lessee can generally claim any GST paid as an ITC | As GST is assessed on the equipment when it is supplied, the customer is subsequently liable for GST on the stamp duty component of any repayment. No GST liability for the balance of repayment, balloon or final transfer of the asset to the customer | There are no GST consequences on repayments, balloons or pay out. |
Disadvantages | No GST claimable up front | No GST claimable up front | General view is that no GST claimable up front if you account on a cash basis. GST is charged on interest costs. | GST claimable up front. But nearly always a charge has to be registered with ASIC and therefore borrowing becomes public knowledge. |
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