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Equipment finance products explained

March 17, 2015

Knowing which finance option to use can be a complex decision because the available options all have pros and cons. Robert Spano, Chief Executive Officer at Alleasing, takes a look at five common equipment finance products and explains how they differ based on eight key metrics.

Rental

Equipment owner: The equipment is owned by the finance company.
Deposit required: A deposit is not required. You can finance 100% of the equipment cost and in some cases can also finance associated soft costs such as installation and maintenance.
Residual liability: There is no residual liability for the organisation renting the equipment.
Income tax implications: Rental is 100% tax deductible provided the equipment is for business use.
GST on payments: GST is payable on rental and can be claimed progressively on payments.
Accounting treatment: Rental is generally treated as off-balance sheet for the renter.
Flexibility: Equipment can be exchanged during the contractual term.
End of term options: The renter has the options to return the equipment, extend the rental period or make an offer to purchase the equipment.

Operating lease

Equipment owner: The equipment is owned by the finance company.
Deposit required: A deposit is not required. You can finance 100% of the equipment cost and in some cases can also finance associated soft costs such as installation and maintenance.
Residual liability: There is no residual liability for the organisation leasing the equipment.
Income tax implications: Operating lease is 100% tax deductible provided the equipment is for business use.
GST on payments: GST is payable and can be claimed progressively on payments.
Accounting treatment: Operating lease is off-balance sheet for the lessee. The lessee must ensure the lease meets relevant accounting tests to qualify as an operating lease.
Flexibility: Equipment can be exchanged during the contractual term.
End of term options: The lessee has the options to return the equipment, extend the rental period or make an offer to purchase the equipment.

Finance lease

Equipment owner: The finance company owns the equipment during the term of the agreement however, there is an expectation the customer will acquire the equipment at the end of term via a balloon payment.
Deposit required: A deposit is not required. You can finance 100% of the equipment cost.
Income tax implications: Lease payments are 100% tax deductible within ATO guidelines re residual size.
GST on payments: GST is payable and can be claimed progressively on payments.
Accounting treatment: A finance lease is accounted for on the balance sheet as an asset and liability.
Flexibility: There is no flexibility to exchange equipment during the term.
End of term options: The lessee must pay out the residual to own the asset or return the equipment and pay the shortfall between the residual and the lessor’s net sale price.

Hire purchase

Equipment owner: The finance company owns the equipment during the term of the contract. Ownership is transferred to the customer upon payment of the final instalment.
Deposit required: Yes, a deposit is required.
Income tax implications: Interest and depreciation are tax deductible.
GST on payments: GST is payable and claimable up front as a lump sum based on total payments or cash price of equivalent.
Accounting treatment: Hire purchase is accounted for on the balance sheet as an asset and liability.
Flexibility: There is no flexibility to exchange equipment during the term.
End of term options: Title passes to the customer upon payment of the last instalment

Chattel mortgage

Equipment owner: The customer owns the equipment, the finance company has a security interest.
Deposit required: Yes, a deposit is required.
Income tax implications: Interest and depreciation are tax deductible.
GST on payments: No GST on loan repayments
Accounting treatment: A chattel mortgage is accounted for on the balance sheet as an asset and liability.
Flexibility: There is no flexibility to exchange equipment during the term.
End of term options: Title remains with the customer, the security interest is no longer relevant.

 

 

Terminology

Lessee: the customer
Lessor: the finance company
Residual (finance lease): the balloon payment paid by the lessee at the end of the lease to assume ownership of the equipment
Residual (operating lease): a finance company’s investment in the equipment.

 

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