Quick answer
A finance lease is an agreement where a financier (the lessor) buys an asset and rents it to your business for most of its working life in exchange for fixed monthly rentals. The lessor stays the legal owner. At the end, you typically pay a pre-agreed residual value to buy it, refinance that residual, or arrange a sale. Your business carries the risk if the asset is worth less than the residual.
Key points
- The lessor owns the asset; your business uses it and pays rentals
- A residual value is set at the start and falls due at the end
- GST is charged on each rental rather than claimed upfront on the price
- Rentals are generally deductible; depreciation stays with the lessor
A finance lease is a long rental with an ownership option bolted on. A financier buys the vehicle or equipment you’ve chosen, your business pays a fixed rental for most of the asset’s useful life, and at the end there’s a lump sum, the residual, that lets you take it over or move on.
In accounting terms, it’s called a “finance” lease because the arrangement works much like borrowing to buy: you carry the benefits and the risks of the asset even though the lessor holds legal title.
How a finance lease runs, start to finish
- Choosing the asset. Your business picks the van, truck or machine and negotiates the price with the supplier.
- Setting the residual. The lessor and your business agree a residual value, a percentage of the cost due at the end. A higher residual means lower rentals now and more to pay later.
- The rental period. The lessor buys the asset, and you pay a fixed monthly rental with GST added. Your business, as lessee, normally insures, services and registers it.
- End of term. Options are to buy the asset by paying the residual, roll that lump sum into a fresh agreement, or have the asset sold. If a sale falls short of the residual, the business pays the difference.
Minimum residuals on vehicles
For car leases, the ATO publishes minimum residual values linked to the lease term. Lessors generally won’t go below these:
| 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% |
Other equipment isn’t tied to this table in the same way; residuals there come down to the lessor’s view of the asset’s working life and resale value.
Comparing a lease with buying outright? Send us the asset details and we’ll set out both.
Worked example: a courier’s van
A courier business leases a $50k refrigerated van over four years. Using the vehicle table, the residual is at least 37.5%, or $18,750.
- Each month the business pays a set rental with GST included and claims that GST in its BAS.
- The rentals are generally deductible as a business expense. The business doesn’t claim depreciation on the van, because it doesn’t own it.
- In year four, the owner has three choices: pay $18,750 and keep the van, refinance the $18,750 over a further term, or sell the van and settle the residual from the proceeds. If the van fetches $16,000, the business covers the $2,750 gap.
Set that against a chattel mortgage: there, the van belongs to the courier at settlement and the GST in its price comes back in the first BAS. Neither is better in every case; it often comes down to how the business manages GST and which tax treatment suits its profit. Courier operators can see more funding options on our couriers industry page.
Finance lease vs operating lease
The quickest test is who carries the resale risk. In a finance lease, your business does, through the residual. In an operating lease, the lessor takes the asset back and wears whatever it’s worth. Our finance lease vs operating lease comparison works through both in detail.
Want a lease priced against the alternatives?
A lease can keep cash in the business when you’d rather not tie it up in a vehicle or machine. The catch is that it only works well if the residual is realistic and the rentals fit comfortably. Describe the asset you have in mind and we’ll set a lease beside a chattel mortgage or hire purchase so you can see the gap. Filling in the form is about a minute’s effort, nobody pulls your credit report at that stage, and what you share isn’t circulated to a crowd of financiers. A member of our team reads each one and calls you back personally. Accurate figures on the asset and its price mean we can line up the right lease the first time.
Frequently asked questions
Who owns the asset under a finance lease?
The lessor owns it for the whole term. Your business has the right to use it and is usually responsible for insurance, servicing and registration. Ownership only passes to you if you pay the residual and buy it at the end.
Can I choose a zero residual?
Generally not on vehicles. ATO guidelines set minimum residual values for car leases depending on the term, so a zero residual would turn the arrangement into something closer to hire purchase. Other equipment can have lower residuals, subject to the lessor's policy.
What happens if the asset sells for less than the residual?
Under a typical finance lease, your business makes up the shortfall. If the sale brings in more than the residual, the surplus generally comes back to you. That risk sharing is the key difference from an operating lease.
Is a finance lease the same as a novated lease?
No. A novated lease is a three-way arrangement between an employee, their employer and a financier, mainly used for salary packaging a car. A finance lease is a straightforward agreement between a business and a lessor.
Can I end a finance lease early?
Usually, but you'll need a payout figure covering the remaining rentals, less any rebate the lessor allows, plus the residual. Early termination is rarely cheap, so check the clause before signing.