What is a lease?

A lease has to identify the asset precisely, whether that is a serial number on a machine or a plan of the premises. It sets the term, including any options to extend or end early, the rent and how it is paid, and the transfer of the right to control the use of the asset for that period.

The clauses that decide how a lease feels to live with are the ones about money and condition: how rent is reviewed, whether by CPI or by market review, who pays outgoings such as rates, utilities and insurance, who handles routine repairs as against structural ones, what security is required, whether that is a bond or a personal guarantee, and what make-good you owe at the end.

Residential tenancy leases cover housing and come with statutory tenant protections set by each state and territory. Commercial leases cover office, retail and industrial space, and are negotiated rather than prescribed, which is why rent reviews, outgoings, fit-out and make-good take up so much of the document.

Split by economics rather than by asset, the line runs between an operating lease, which is short relative to the asset's life and leaves residual risk with the lessor, and a finance lease, which passes the substantial risks and rewards of ownership to the lessee. Specialised forms include equipment leases for machinery, IT and medical gear, vehicle and novated leases, and consumer leases, which carry consumer protections.

AASB 16 changed lessee accounting. A lessee recognises a right-of-use asset and a lease liability for most leases, with exemptions for short-term and low-value assets. The liability is the present value of the future payments, so the discount rate matters. It then unwinds with interest while the right-of-use asset is depreciated, which replaces a straight-line rent expense with depreciation plus interest, and moves EBITDA and gearing.

Tax follows the legal substance rather than the accounts. Rentals under an operating or finance lease are generally deductible as an expense, while hire purchase and leases of cars above the ATO car limit are treated as a notional sale and loan, so the payments split into interest and depreciation. GST is generally payable on commercial lease payments and equipment rentals where the lessor is registered, and a registered lessee can usually claim input tax credits, while residential rent is input taxed and carries no GST credit. Novated and salary-packaged car leases bring fringe benefits tax into play. Confirm the classification with your accountant.