Quick answer
Under a finance lease your business takes on the asset's end value: there's an agreed residual you pay, refinance or cover from a sale. Under an operating lease the leasing company carries that risk and you hand the asset back at the end, often after paying a rental that includes servicing. Finance leases suit assets you'll keep or upgrade on your terms; operating leases suit gear that dates quickly or that you never want to resell.
Key points
- The real dividing line is residual risk: yours under a finance lease, the lessor's under an operating lease
- Operating lease costs hide at the end: kilometre caps, wear and tear charges and return conditions
- Vehicle finance leases follow ATO residual minimums, from 65.63% over one year to 28.13% over five
- For businesses reporting under AASB 16, both kinds of lease now sit on the lessee's balance sheet
- Neither gives you the instant asset write-off; that belongs to the owner, which is the lessor
- Finance lease residual risk
- Your business
- Operating lease residual risk
- The leasing company
- Servicing included?
- Often in operating leases, rarely in finance leases
- End of operating lease
- Return, extend or upgrade
Every lease contains a quiet bet on what the asset will be worth when the term ends. With a finance lease, your business makes that bet. With an operating lease, the leasing company does, and it prices that risk into your rental. Nearly every other difference between the two (servicing, end-of-term charges, whether you can keep the asset) flows from who is holding that bet.
Side by side
| Finance lease | Operating lease | |
|---|---|---|
| Who owns the asset | The financier | The leasing company |
| Who carries the end-value risk | Your business | The leasing company |
| What’s owed at the end | An agreed residual | Nothing, provided the asset is returned in agreed condition |
| Your options at the end | Pay the residual and own it, refinance it, or sell it and cover any shortfall | Return it, extend the lease or upgrade |
| Servicing and running costs | Usually your responsibility | Often bundled: maintenance, tyres, registration, roadside help |
| Usage limits | Rarely | Kilometre or hours caps are common |
| Typical assets | Trucks, machinery, vehicles you’ll keep | Fleet cars, forklifts, IT, photocopiers, medical devices |
| GST | Included in each payment and the residual | Included in each rental |
| Instant asset write-off | Not available to you | Not available to you |
Why the residual changes everything
On a finance lease, the residual is a number agreed at the start. For vehicles, the ATO’s guideline minimums apply: 65.63% of cost for a one-year lease, 56.25% for two, 46.88% for three, 37.50% for four and 28.13% for five. Leases priced with residuals below those minimums risk being treated for tax as an instalment purchase rather than a lease. When the term ends, if the asset sells for less than the residual, your business pays the gap; if it sells for more, the surplus usually comes back to you.
On an operating lease, the lessor estimates the future value itself and sets the rental accordingly. If it guesses wrong and the asset is worth less, that’s its problem. Your exposure instead sits in the return conditions: kilometres over the cap, damage beyond fair wear and tear, missing service history or parts. Those charges can be significant, which is why the cheapest monthly rental isn’t automatically the cheapest lease.
Our glossary entry on residual value shows how the end figure interacts with repayments.
Did AASB 16 erase the difference?
For lessees, largely yes on paper. Under AASB 16, which applies to businesses reporting under the full Australian accounting standards, a lessee brings most leases onto its balance sheet as a right-of-use asset and a matching lease liability, whether the contract is called finance or operating. Short-term leases (12 months or less) and low-value assets can be excluded. The old line that an operating lease kept debt off the balance sheet no longer holds for those businesses. Leasing companies still classify leases as finance or operating in their own accounts.
For many small private companies that prepare simpler accounts, the presentation may differ. The commercial difference, meanwhile, is unchanged: who carries the residual, who services the asset and what you owe on the last day.
When a finance lease wins
- You want to keep the asset or at least decide for yourself at the end. A finance lease gives you a clear path to ownership by paying the residual.
- The asset holds its value well. Prime movers, quality machinery and popular utes often sell above a conservative residual, and that upside comes back to you.
- You run assets hard. No kilometre caps or hours limits, and no return inspection to worry about.
- You prefer to service it yourself or already have a workshop or preferred mechanic.
The finance lease page explains early payout and how to refinance a residual. If you want ownership from day one instead, see chattel mortgage vs finance lease.
When an operating lease wins
- The asset dates quickly. Laptops, servers, medical scanners and some fleet cars lose value or relevance well before they wear out.
- You want one predictable payment. Bundled servicing, tyres and registration make budgeting simple for a fleet.
- You never want to sell used gear. Handing back keys beats advertising forty used sedans.
- Your use is moderate and predictable, so kilometre caps and return standards won’t bite.
The operating lease page covers return conditions and break costs in more detail.
Weighing up a lease on vehicles or equipment? Give us a quick outline and a specialist will help you test the numbers.
An illustrative fleet decision
A labour-hire company needs six vans for crews across two cities, and expects to replace them every three years.
- Operating lease. The leasing company quotes a monthly rental per van that includes servicing, tyres and registration, with a 30,000 km annual cap. At the end, the company returns the vans and leases new ones. The risk is excess kilometres and damage charges if crews treat the vans roughly.
- Finance lease. The monthly payment per van is lower, but servicing, tyres and registration come on top, and each van carries a residual of about 46.88% of cost after three years. At the end the company sells or trades the vans; if used-van prices have softened, it covers the shortfall.
If crews drive well beyond the cap or the company has its own maintenance arrangements, the finance lease tends to win. If drivers are moderate and the business wants no involvement in resale, the operating lease’s predictability is worth paying for. Our labour-hire industry page covers how lenders view that sector more broadly.
What to ask before signing either
- What is the total cost over the term, including the residual or likely return charges?
- What are the kilometre or hours caps, and how is excess usage charged?
- How is fair wear and tear defined, and who carries out the return inspection?
- What servicing, tyres and registration are included, and what isn’t?
- How is early termination calculated?
- If it’s a car, does the price exceed the car limit ($69,883 for 2026–27), and how does that change the tax treatment?
Making the next asset easier to fund
Whether you lease, hire purchase or buy outright, the first hurdle is finding a financier willing to back your business at a sensible total cost. That can be harder when a business is young, growing quickly or has had a rough patch. Starting an enquiry is a one-minute task, and doing it leaves your credit score where it is. We handle it ourselves rather than spreading it to every lender we know, and an experienced person looks over your situation, then gets in touch by phone. Accurate details on the assets, how they’ll be used and your trading figures help us recommend the right structure without guesswork.
Frequently asked questions
Which is cheaper, a finance lease or an operating lease?
Monthly payments on an operating lease can look higher because they may include servicing and the lessor's resale risk. A finance lease often looks cheaper each month but leaves a residual to settle. Compare the total cost over the term, including the residual or the likely return charges, and what you'd otherwise pay for servicing.
Can I buy the asset at the end of an operating lease?
Sometimes the lessor will offer it at a market price, but there's no fixed right to buy. If you're confident you'll want to keep the asset, a finance lease, hire purchase or chattel mortgage is usually the better starting point.
Are both kinds of lease tax deductible?
Lease payments for assets used in the business are generally deductible under both, to the extent of business use. The exception is a car costing more than the car limit, where special rules treat the lease as a notional loan. Your accountant should confirm how your lease is treated.
Does AASB 16 mean leases are no longer off balance sheet?
For lessees reporting under the full accounting standards, yes: most leases are recorded as a right-of-use asset and lease liability, apart from short-term and low-value leases. Many small private businesses prepare simpler accounts, so ask your accountant how your statements handle it.
What happens if I damage a leased asset?
Under a finance lease, damage reduces what the asset fetches against the residual, so you bear the loss. Under an operating lease, damage beyond fair wear and tear is charged when you return it. Insurance is required under both.
Can a small business get an operating lease?
Yes, particularly for cars, light commercial vehicles, forklifts and IT. Leasing companies look at your trading history, financials and credit, and may want a director's guarantee from newer businesses.