What is a lease purchase?

You and the lessor sign an agreement that sets the term, the rentals, the residual and who is responsible for what. The lessor buys the asset and you use it. Regular rentals cover the right to use it and include a lease charge, so through the term the lessor holds legal title and you hold the keys.

At the end of the term you have choices: pay the residual and take ownership, refinance the residual, or, less commonly, hand the asset back if the contract allows. Most lease purchases are written for ownership rather than return. Once the purchase price is paid the title transfers, and any security interest the lessor registered on the Personal Property Securities Register should be discharged.

The headline rental is only part of the picture. Add the lease charge across the term, the residual, establishment and admin fees, and PPSR registration costs. Ending the agreement early usually triggers a penalty and a requirement to clear the outstanding finance, so read that clause before you sign. Stamp duty may apply depending on the state and the type of asset.

Maintenance and insurance normally sit with the lessee unless a maintenance pack is built in. The fair way to compare offers is total cost of ownership: total rentals plus the residual plus fees, measured against the same figure for a hire purchase or a chattel mortgage, where the equivalent end-of-term amount is called a balloon payment.

GST treatment depends on how the contract is structured and whether your business is registered. You may be able to claim input tax credits on the GST in the rentals or on the purchase, and the timing can differ from a chattel mortgage, where the credit is generally claimed at purchase. Confirm the treatment in the contract and with the ATO or your accountant.

For accounting, AASB 16 brings most leases onto the balance sheet as a right-of-use asset and a lease liability. If the contract effectively transfers ownership, or contains a bargain purchase option, it may be treated as a purchase. For tax the ATO generally treats a lease with a purchase option as a notional sale and loan from the start, so you claim the decline in value of the asset and the finance charge inside each payment rather than deducting the full rental. Confirm the treatment with your accountant. A novated lease with a purchase option also brings fringe benefits tax into play.