Finance lease: using a vehicle or machine the financier owns

Some owners want their name on the title. Others care far more about steady, deductible outgoings and keeping the purchase price off the books in the year they buy. The finance lease grew out of that second instinct. It’s less common than it was for small businesses, which now often prefer a chattel mortgage, but for certain assets and certain tax positions it’s still the better fit.

How does a finance lease work?

Three steps sit at the heart of it:

1. You pick the asset. A forklift, a truck, a CNC machine, medical imaging equipment, a fleet of vans.
2. The financier buys it from the supplier and becomes the legal owner (the lessor).
3. Your business leases it (as the lessee) for an agreed term, usually two to five years, making regular payments and taking responsibility for insurance, registration, servicing and repairs.

The payments are calculated so that, over the term, they cover most of the asset’s cost plus the financier’s return. The rest is the residual value: an amount set at the start that’s left outstanding when the lease ends.

That residual is the defining feature, and it’s where most of the decisions are made.

The residual: ATO minimums and who carries the risk

For vehicles, the residual can’t simply be set at zero or any number you like. The ATO publishes minimum residual values for car leases, worked out on an effective life of eight years:

Lease term	Minimum residual (% of cost)
1 year	65.63%
2 years	56.25%
3 years	46.88%
4 years	37.50%
5 years	28.13%

Equipment residuals are usually set by reference to the asset’s expected value and effective life. Financiers have their own policies, and going too low can create tax problems.

Here’s the catch many lessees miss. Under a finance lease, the residual risk sits with you. If the asset is sold at the end and fetches less than the residual, your business pays the difference. If it sells for more, the surplus normally comes to you. That makes a finance lease economically much closer to owning than renting, and it’s the main thing separating it from an operating lease, where the financier takes the resale risk.

GST and tax: the practical differences

GST. Because the financier buys the asset, it claims the GST on the purchase. Your business pays GST as part of each lease payment and, if registered, claims credits on those payments as you go. There’s no lump-sum GST refund at the start, which is the biggest cash flow difference from a chattel mortgage.

Income tax. Your business normally writes off each rental against income, in line with its business-use share. You don’t claim depreciation, because you don’t own the asset, and the instant asset write-off doesn’t apply to leased assets.

The luxury car exception. If you lease a car costing more than the ATO car limit ($69,883 for 2026–27), the tax rules change. A lease like that is treated as a notional sale and loan: you split payments into notional principal and a finance charge, claim the finance charge, and claim depreciation on a cost capped at the car limit. For anyone leasing a prestige car through the business, this removes much of the appeal of leasing over buying. Get your tax agent to run the numbers before signing.

On the balance sheet. Businesses preparing financial statements under AASB 16 record most leases as an asset and a liability anyway, so the old idea of a lease being “off balance sheet” mostly applies now to smaller businesses using simpler reporting. Ask your accountant which applies to yours.

Weighing a lease against buying? Send us the details and we’ll talk through both. A one-minute form, and no credit enquiry is recorded for it.

Your choices when the term runs out

You’ll normally have three choices:

• Settle the residual and the title transfers to your business.
• Refinance the residual, either into a new lease or a loan, and keep using the asset.
• Sell the asset (often arranged by the financier or a dealer) with the proceeds used to pay the residual. You pay any shortfall or receive any surplus.

Some agreements also allow you to upgrade by trading the asset into a new lease. Plan your end-of-term choice when you sign, not when the final notice arrives.

What lenders check

Area	What they look for
The asset	Type, new or used, resale market and expected value at term end
Residual setting	Realistic against the asset’s likely value, and within ATO guidance for vehicles
The business	Trading history, ABN and GST registration, bank statements or financials
Credit	Business and director files, assessed case by case
Insurance	Comprehensive cover with the financier noted as owner

Example: a warehouse forklift fleet

A Sydney third-party logistics business needs four new forklifts at $48,000 each, $192,000 in total plus GST. It’s growing fast, wants predictable outgoings, and its accountant would rather spread the GST over time than have a large credit swing through one BAS.

• A financier buys the forklifts and leases them to the business for four years with a residual set at a realistic share of expected resale value.
• The business claims GST credits on each monthly payment, and deducts the payments as an expense.
• In year four, the owner compares paying the residual to keep the fleet against selling the forklifts through the dealer and starting a new lease on replacements.

The figures are illustrative. The decision point it shows, residual versus likely resale value, is the one that matters most.

Pros and cons

Pros

• Payments generally deductible and predictable
• GST spread across the term instead of claimed in one hit
• Often little or no deposit needed
• Simple path to upgrade at the end

Cons

• You carry the residual risk if values fall
• You don’t own the asset unless you pay out the residual
• No depreciation or instant asset write-off for you
• Luxury car leases lose most of their tax advantage

Not sure which structure fits? Compare chattel mortgage vs finance lease and finance lease vs operating lease, or read the broader overview of equipment finance. For businesses buying machinery, our manufacturers page covers sector-specific points.

Lease, buy or something in between

Choosing between leasing and buying comes down to cash flow, tax and what you’ll want to do with the asset in a few years. We can help you think it through as well as find the funding.

Our form is quick, usually a minute from start to finish, and submitting it does nothing to your credit score. It isn’t fed out to multiple financiers; a single member of our team works through it and rings you personally. Note the asset, the price, how long you expect to keep it and your GST status as precisely as possible, which lets us recommend a structure that suits from the outset.

Compare lease and loan options with us →