What is a sale and leaseback?

It starts with an assessment: which asset to sell, how much cash the business needs, what its loan covenants allow and what the tax position looks like. A current valuation sets the price. The sale terms (price, settlement date, warranties, GST allocation and any retention for adjustments) are negotiated at the same time as the lease terms (rent, reviews, term, options and maintenance obligations), so the key commercial terms are locked in before settlement.

Lawyers draft the sale and lease documents and tax advisers review the GST, income tax and capital gains consequences. At settlement, title transfers, the proceeds are paid and the seller becomes the lessee, paying rent on the agreed schedule. The business then monitors covenant effects, insurance and maintenance, and plans for the end of the lease: renew, repurchase if agreed, or hand the asset back.

Property leasebacks are typically large-ticket deals with long leases and CPI or market rent reviews. Equipment leasebacks usually have shorter terms, sometimes bundled maintenance, and different tax and depreciation outcomes. Short-term structures of one to three years suit bridging working capital; long-term arrangements of five to twenty years or more suit real estate and strategic plant.

The name matters less than the substance. Who controls the asset and who bears its risks and rewards drives the accounting, and some structures end up looking more like a hire purchase or chattel mortgage than a true lease. Synthetic leases designed to keep the asset off the balance sheet have largely been curtailed by AASB 16, which looks through to the economic substance of the arrangement.

The main attraction is immediate cash: capital tied up in fixed assets is released to fund operations, repay debt or invest, while the business keeps using the asset with no relocation or downtime. Fixed assets become liquid funds, gearing ratios may change depending on the accounting treatment, lease payments may be deductible, and some residual and disposal risk passes to the lessor.

The costs are just as real. One-off proceeds are exchanged for recurring rent that may exceed the previous holding cost, and future increases in the asset's value go to the buyer. The new lease liability affects balance-sheet metrics and can influence lender decisions and refinancing. The accounting and tax treatment needs specialist input, and stakeholders may read the sale as a sign of liquidity pressure.

Under AASB 16 the first question is whether control passes to the buyer. If it does, the deal is a sale: the seller derecognises the asset, recognises a right-of-use asset and lease liability, and books a gain reduced for the right of use retained, while the buyer recognises a sale and accounts for the lease as a finance or operating lease. If control does not pass, the transaction is treated as financing and the buyer recognises a financial asset rather than the asset. The key judgements are control, lease term and the discount rate.

For tax, the sale is generally a taxable supply, so GST may apply to the proceeds and the lease payments. Proceeds can trigger a capital gain or a balancing adjustment on a depreciating asset, and the depreciation deductions move from seller to lessor. Property deals also attract state transfer duty, normally payable by the buyer, and some states charge duty on leases, so check with the relevant state revenue office, your tax adviser and the ATO.