Written byRentals are arrangements to pay for the use of an asset without owning it, and in a lease contract the periodic payments themselves.
Also known as: rental, equipment rental, asset rental
Key points
- Rentals can mean the arrangement itself, from short-term hire to an operating lease, or the periodic lease payments due under it.
- The owner, usually a lessor or rental company, keeps ownership and typically bears some or all of the residual value risk.
- Rental payments for business-use assets are generally deductible as an operating expense, and GST-registered businesses claim the GST on each payment.
- At the end of the term you return the asset, extend the rental or, where the agreement allows, buy it under a purchase option.
- Commercial rentals between businesses are generally unregulated agreements outside the NCCP Act, though Australian Consumer Law still applies.
Types of rental
Short-term equipment hire covers a crane, excavator or specialised tool needed for a project, with hire periods of days, weeks or months. An operating lease is a longer-term rental, typically two to five years, where the lessor keeps ownership and the residual value risk; it is common for vehicles, IT equipment and office fitouts.
Contract hire bundles maintenance, insurance and fleet management into the rental and is popular for vehicle fleets. Rent-to-own, also called lease-to-own or rental purchase, adds an option or commitment to buy the asset at the end of the term, often at a predetermined price. The common thread is that you pay for use of the asset rather than financing its purchase.
How rentals differ from finance products
With a chattel mortgage or hire purchase you own the asset outright or at the end of the term, and with a finance lease you carry the residual value risk; in each case the asset sits on your balance sheet. With a rental, ownership and residual risk stay with the lessor, and some short-term and low-value rentals can still be kept off the balance sheet under AASB 16.
The tax treatment splits along different lines: a chattel mortgage or hire purchase buyer claims depreciation and interest, while a finance lease lessee and a renter both deduct the payments and claim the GST on each one. A rental tends to suit assets with a short useful life, assets exposed to technological obsolescence such as IT hardware and medical equipment, and project-based work in construction, mining or events where needs change.
Costs, terms and end-of-term options
Look beyond the headline payment. Multiply the periodic payment by the number of periods, add delivery, collection or setup fees, and compare the total with buying or financing the asset. Most commercial rentals have a minimum term, and ending early can trigger break fees or an obligation to pay out the remaining term. Check whether maintenance and insurance are included, as they are in a full-service lease, or are your responsibility.
Rental agreements usually specify the condition the asset must be returned in, so excess wear, damage or missing components can attract extra charges, and vehicle or equipment rentals may cap kilometres or operating hours. Before signing, understand whether you can extend, return, upgrade or purchase at the end of the term and what each option costs. Consumer rentals of household goods may be regulated under the NCCP Act as credit contracts or consumer leases.
Example
A civil contractor wins a six-month drainage job and rents an excavator rather than buying one. The rental company keeps ownership, the contractor claims each monthly rental as an operating expense and the GST on it in each BAS, and there is no deposit or balloon to manage. The agreement caps operating hours and sets return conditions, so the contractor tracks hours and returns the machine clean and undamaged. When the job ends the excavator goes back, and the contractor is not left with an idle asset.
Not to be confused with
Frequently asked questions
What is the difference between a rental and a lease?
In everyday language the words are interchangeable. In finance, a rental usually means shorter-term use with no transfer of ownership, while a lease can be an operating lease, which works like a rental, or a finance lease, which works more like secured lending with the lessee carrying the residual value.
Is renting equipment tax deductible?
Generally, yes. Rental payments for equipment used to produce business income are deductible as an operating expense in the period they are incurred, rather than through depreciation and interest as with ownership finance. GST-registered businesses also claim the GST component of each payment as an input tax credit on their BAS.
What happens if I damage rented equipment?
You will usually be liable for repair costs or a damage charge as set out in the rental agreement, and excess wear or missing components can attract extra charges on return. Check whether the rental includes insurance or whether you need to arrange your own cover before the asset is delivered.
Can I rent equipment and then buy it?
Sometimes. Some rental agreements include a purchase option, and rent-to-own arrangements build in a right or commitment to buy at a pre-agreed price, with part of each payment sometimes credited to the purchase price. If your agreement has no option you can often negotiate one, but compare the total cost against financing the asset from the start.
Are commercial equipment rentals regulated in Australia?
Rentals between businesses generally fall outside the NCCP Act because they are for business purposes, so they are governed by contract law and Australian Consumer Law rather than responsible lending obligations. Consumer rentals of household goods may be regulated as credit contracts or consumer leases, depending on the length, purchase options and total payments.
Related terms
Operating lease
An operating lease is a lease where you pay to use an asset for a set term and hand it back, with the financier keeping ownership and the resale risk.
Read definitionHire
Hire is a contract under which an owner or supplier lets a hirer use goods for an agreed period in exchange for payment, while title stays with the owner.
Read definitionLease
A lease is a contract giving the lessee the right to use an asset owned by the lessor for a set term in return for payments.
Read definitionContract hire
Contract hire is a fixed-term vehicle or equipment lease where a business pays fixed rentals for exclusive use of the asset while the lessor keeps ownership and resale risk.
Read definitionResidual value
Residual value is the amount a leased car or asset is expected to be worth when the lease ends, set at the start and used to calculate the rentals.
Read definitionFinance lease
A finance lease is a lease where the financier owns the asset and your business pays to use it for most of its life, taking on the risks of ownership.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.