A Finance Lease is a business use loan type. The vehicle is purchased by the financier, referred to as the Lessor and rented to the borrower, referred to as the Lessee in monthly instalments. The Lessee would still usually be able to source the vehicle and negotiate the price themselves.
As the Lessor is the purchaser of the vehicle, the Lessor has the ability to claim the GST from the purchase price and would then calculate the rental payments in the Lease Agreement on the GST exclusive amount. The rental payment is subject to GST and if the Lessee is registered for GST may have the ability to claim the GST in their rental payments as an input tax credit over the term of the Lease.
At the end of the term of the car lease would be a Residual Value, which is also subject to GST and the Residual would be based off guidelines as set out under the IT28 Ruling from the Australian Taxation Office.
When the Residual Value is due and payable, the option to Lease this over a new term may be available and the ownership of the vehicle remains the Lessors. The other options would be to payout the Residual Value as a cash settlement, which may be done from the sale of the vehicle, or to payout the Residual Value from the Lessee’s own funds via cash or financing and if this was the case the ownership of the vehicle becomes the Lessees, by purchasing the vehicle from the Lessor for the Residual Value.
Unlike other business use car finance, the ability to claim the whole repayment as a tax deduction is available. Often clients may misunderstand this as a greater tax deduction overall and is not always the case due to the vehicle being owned by the Lessor, so the deductions for depreciation are not available under a Lease Agreement for the Lessee and the amount of deductions may also be determined on individual tax brackets. It is recommended to get professional tax advice prior to deciding which business use structure is best for your own circumstances.
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