Sales and Leaseback: How They Work & Accounting

Updated 12 Mar 2026Content was accurate at the time of publication

What is a sales and leaseback?

A sales and leaseback is a financing transaction where you sell an asset you own to a buyer (the lessor) and immediately lease it back so you can keep using it. Typically the seller is an operating business and the buyer is an investor, bank or specialist lessor. Common assets include commercial property, manufacturing plant, specialised equipment, vehicles and fleets.

In one line: you monetise an owned asset to release cash while retaining operational use through a lease. This structure sits between outright asset disposal and new borrowing, and is often used to improve working capital, optimise the balance sheet or reallocate capital.

How a sale and leaseback works — step by step

Typical deal flow from approach to completion:

Initial assessment
- Identify the asset to monetise and quantify cash needs, covenant constraints and tax position.
- Obtain a current valuation and market indications.

Negotiate sale terms
- Agree price, settlement date, warranties and GST/tax allocations with the purchaser/lessor.
- Agree any retention or holdback for adjustments.

Simultaneous lease negotiation
- Negotiate lease terms (rent, indexation/review, term, options, maintenance obligations).
- Lock key commercial terms before settlement to reduce transition risk.

Legal and tax structuring
- Lawyers draft sale and lease documents; tax advisers review GST, income tax and capital gains implications.

Settlement and handover
- Transfer title, pay sale proceeds and put possession arrangements in place.
- The seller becomes the lessee and starts lease payments under the agreed schedule.

Accounting and reporting
- Apply AASB/IFRS 16 to determine whether a sale has occurred and how to recognise any gain, right-of-use asset and lease liability.
- Prepare disclosures for financial statements.

Ongoing management
- Monitor covenant impacts, lease compliance, insurance and maintenance.
- Plan for lease end: renew, repurchase (if agreed), or return.

Common types of sale and leaseback transactions

Structures vary by asset type and commercial intent.

Property vs equipment

Property sale and leaseback transactions typically involve large-ticket items with long-term leases featuring CPI or market reviews. Equipment sale and leaseback deals often have shorter terms, bundled maintenance, and different tax and depreciation outcomes.

True lease vs finance economics

The economic substance (control, risks and rewards) drives accounting treatment more than the name. Some structures may resemble hire purchase or chattel mortgage arrangements depending on who bears risk and rewards.

Synthetic lease vs true leaseback

Synthetic structures aimed at off-balance-sheet treatment are largely curtailed by AASB/IFRS 16. Modern accounting standards focus on identifying the economic substance of the arrangement.

Short-term vs long-term

Short-term structures (1–3 years) suit bridging working capital, while long-term arrangements (5–20+ years) suit real estate and strategic plant.

Why businesses use sale and leaseback (benefits)

Primary commercial advantages:

Immediate cash release — Unlock capital tied up in fixed assets to finance operations, repay debt or invest.

Balance-sheet and capital-structure management — Convert fixed assets into liquid funds without operational interruption; potential to change gearing ratios depending on accounting treatment.

Tax and cashflow timing — Lease payments may be tax-deductible; GST and capital gains timing effects can be managed with advice.

Operational continuity — Continue to use critical assets without relocation or downtime.

Risk transfer — Some residual and disposal risks can transfer to the lessor.

Key risks and disadvantages

Things to weigh carefully:

Ongoing rental cost — One-off sale proceeds are exchanged for recurring lease payments that may exceed prior holding costs.

Loss of capital appreciation — Future increases in asset value will benefit the buyer, not you.

Covenant and refinancing risk — Lease liabilities affect balance-sheet metrics and may influence lender decisions.

Accounting and tax complexity — Treatment under AASB/IFRS 16 and GST/income tax consequences require specialist input.

Perception and strategic risk — Stakeholders may interpret a sale as a liquidity signal; consider communications and lender reactions.

Accounting treatment (AASB/IFRS 16)

AASB/IFRS 16 changed how sale and leaseback transactions are assessed. Here are the essential points for decision-makers:

Does a sale occur?

The essential test is whether control of the asset transfers to the buyer. If control transfers, treat the transaction as a sale; if not, treat it as financing. Consider transfer of significant risks and rewards, physical possession, legal title and decision-making rights. This interacts with AASB 15 (revenue recognition) and AASB 16.

Measuring any gain or loss

If a sale is recognised, measure any gain or loss per revenue/sale rules, but adjust for the portion that represents the retained right-of-use (ROU) asset. The accounting prevents recognising a full sale gain if you immediately retain the asset's economic benefits through a lease.

Lessee (seller) accounting — practical outcome

Most sale-and-leaseback transactions result in the seller recognising a right-of-use asset for the leased-back use and a lease liability for the present value of lease payments, unless the arrangement is a financing in substance. The timing and amount of any recognised gain are adjusted to reflect the retained ROU interest.

Lessor (buyer) accounting — practical outcome

The buyer recognises a sale (if criteria met) and accounts for the lease — either as a finance lease (net investment) or an operating lease, depending on economics.

Key judgement points to document

Control transfer assessment
Lease term and renewals (impact on accounting term)
Discount rate selection for present-value calculations
Allocation of consideration between sale and lease components

For authoritative guidance, consult AASB 16 at https://www.aasb.gov.au and relevant implementation guidance.

Tax and GST considerations

Tax outcomes depend on asset type and structure. High-level points:

GST

The sale of a business asset is generally a taxable supply; GST may apply to sale proceeds and to lease payments. Confirm GST treatment in the sale contract.

Income tax and capital gains

Sale proceeds can trigger capital gains or balancing adjustments for depreciating assets. Lease payments are typically deductible for lessees.

Depreciation and ownership

The seller generally loses depreciation deductions for the asset; the lessor may claim depreciation as owner for tax purposes.

Cross-border and transfer pricing

International transactions may raise thin capitalisation or transfer pricing issues.

Always confirm specifics with the ATO at https://www.ato.gov.au and a specialist tax adviser.

Commercial terms and negotiation points

Key commercial levers to negotiate:

Rent and review mechanism (CPI, fixed escalations, market reviews; caps/floors)
Lease length, renewal and break options
Security: guarantees, bank guarantees or deposits
Maintenance and capital expenditure responsibilities
Insurance obligations and indemnities
Assignment and subletting rights
Termination events, change-of-control provisions and early-exit mechanics

Ensure terms align with intended accounting and commercial outcomes to avoid unexpected balance-sheet or cashflow effects.

When to consider a sale and leaseback — decision checklist

Practical checklist before proceeding:

Do you need immediate cash and how does this compare with debt or equity alternatives?
Is the asset strategically essential?
How will the deal affect covenants, gearing and credit capacity?
Are the projected lease payments affordable under different interest-rate scenarios?
Are market conditions (property or equipment values) favourable?
What are the tax/GST and depreciation consequences?
Are there likely accounting issues under AASB/IFRS 16?
Have you obtained a current valuation and independent advice?

Alternatives and comparisons

Compare sale and leaseback with common alternatives:

Option	Pros	Cons
Sale and leaseback	Immediate cash, operational continuity	Ongoing rent, loss of ownership
Secured loan / mortgage	Retain ownership; interest may be deductible	Increases debt, may require security over asset
Equipment finance / hire purchase	Structured repayments; possible ownership at term	May need deposit or higher payments
External lease finance	Maintenance packages and flexibility	Potentially higher lifecycle cost
Securitisation / asset sale	Large capital raise possible	Complex and higher transaction costs

For asset finance or property lending options, explore solutions such as asset finance and commercial property loans.

Worked example (simple, illustrative)

You own a factory machine with a carrying value of $100,000 and a market value of $100,000. You sell it and lease it back for 5 years with annual lease payments of $180,000 (paid annually) and no purchase option.

Immediate cash inflow

Sale proceeds: +$100,000

Accounting — simplified outcome (sale recognised)

Derecognise the owned asset and recognise any gain on sale.
Recognise a right-of-use asset and lease liability measured at the present value of lease payments (discounting required).
The recognised gain is adjusted to reflect the retained right-of-use interest under AASB 16.

Cash position after

+$100,000 sale proceeds less any immediate tax/GST and transaction costs.

P&L impact in year 1

Replace owner-depreciation with ROU depreciation and interest on the lease liability. Total charge in year 1 is often similar to the prior combined depreciation and financing cost but can vary across the lease term.

Practical takeaway: the transaction provides immediate liquidity at the cost of future lease payments and recognition of a lease liability on the balance sheet. Model covenant and cashflow impacts before signing.

Practical next steps and documentation

If you proceed:

Engage stakeholders early: CFO, treasury, tax adviser, valuer, legal counsel and accountants.
Obtain independent valuations and several indicative bids to establish market pricing.
Run scenario models for covenant impacts and cashflow sensitivity (for example, interest-rate shocks).
Prepare documentation: sale contract, executed lease, disclosure schedules, tax/GST allocation and insurance assignments.

Typical advisers to involve:

Corporate lawyer (sale and lease drafting)
Tax adviser (GST, income tax)
Valuer (market value evidence)
Auditor/accountant (AASB/IFRS 16 treatment)
Broker or specialist lessor

FAQ

Does sale and leaseback affect control of the asset?

If legal title and control transfer to the buyer it is treated as a sale for accounting, even though you retain operational use as lessee.

Is a sale and leaseback taxable?

The sale may give rise to assessable income, capital gains and GST. Treatment depends on asset class and structuring; consult your tax adviser and the ATO at https://www.ato.gov.au.

Can SMEs use sale and leaseback?

Yes — many SMEs use this to unlock working capital. Consider transaction costs and negotiation leverage.

What happens at lease end?

Options include renewal at market rent, repurchase (if agreed), purchase at residual price or return of asset. Negotiate options up front.

Will a sale and leaseback show on my balance sheet?

Under AASB/IFRS 16, most leasebacks result in a right-of-use asset and lease liability, so balance-sheet effects are common.

Key takeaways

Sales and leaseback can be an efficient way to release capital while preserving operational use of assets, but success depends on accounting treatment under AASB/IFRS 16, tax and GST consequences, and long-term commercial costs. Use the checklist and worked example to model outcomes, involve valuation, tax and legal specialists early, and negotiate lease terms that protect your flexibility and cost profile. The real value is realised when liquidity needs, covenant impacts and tax effects align with your strategic plans.