Car Leasing Information for Australian’s

When you lease a car, this type of finance is a little different to the general conditions of a normal car loan, and the main difference is that you don’t own the car and the flexibility of the loan structure may be determined by tax guidelines as set out by the Australian Taxation Office (“ATO”).

Why don’t I own the car?

Any type of Lease Agreement is where the Lessor (financier) purchases the asset from the vendor (seller). The Lessor may have the ability to claim the GST from the asset as an input tax credit in their Business Activity Statement (“BAS”). The Lessor will then rent the asset to the Lessee (borrower) by charging periodic rental payments.

If the Lessor was able to claim the GST as an input tax credit, they will calculate your rental payments on the GST exclusive amount. The rental payments will be subject to GST throughout the Lease term, payable by the Lessee.

The circumstances where the Lessor may not have the ability to claim the GST would be when the asset was not subject to GST, such as a purchase from a private sale, where the vendor was not registered for GST.

As the asset is owned by the Lessor, this is not a Capital Asset to the Lessee, which means this would not show on the Lessee’s Balance Sheet in their financial statements, but only as an expense in their Profit & Loss Statement.

This also means that the whole rental payment may be available as a tax deduction, usually as a percentage based on the proportion of the business usage, as would be the case with the GST incurred on the rental payment if the GST were able to be claimed as an input tax credit through the Lessee’s BAS.

How come the ATO determines the structure of a Lease Agreement?

With each rental payment made, the car would not be getting any equity in regards to the outstanding balance and the value of the car, so Lease Agreements will have a Residual Value at the end of the Lease term, which is a forecasted, depreciated value of the car.

This means at the end of the Lease term, there will be the Residual Value outstanding, which in essence, as per the ATO guidelines, the vehicle’s value should be around the same amount as what the Residual Value is, this is why the Residual percentage would be different, dependent on the Lease term and could at times be reduced under the ATO guidelines, if more than annual average kilometres were to be estimated.

The Lessor may give the option to the Lessee to purchase the car for the Residual Value when it is due, and then the title of the car would become the Lessees. Other options may include extending the Lease, using the Residual Value as the new value.

There are variations with Lease Agreements, but most are when the car is used predominantly for business use, with the exception of Novated Leases, which is a Lease with a three way agreement between the Lessor, the Lessee and the Lessee’s employer, giving the Lessee the ability to salary sacrifice the rental payments and various other vehicle running costs.