What is tax-based leasing?

The structure splits who uses the asset from who owns it for tax. The lessor buys the asset and is the tax owner. The lessee pays regular rentals over a fixed term, and those rentals cover the lessor's cost, its return and its exposure to what the asset is worth at the end. At term end the asset has a residual value, and the lessor normally wears that risk.

That is what makes it a genuine lease rather than a sale in disguise. A hire purchase or conditional sale effectively transfers ownership and is taxed like a purchase. Even where the contract says lease, the ATO looks at the substance: who bears residual risk, and whether the lessee can buy the asset at a bargain price.

For the lessee, rentals are generally deductible for tax in the period they are incurred, and a GST-registered business can usually claim input tax credits on the GST in each payment, to the extent of business use. Spreading GST across the rentals rather than paying it on a purchase price helps cashflow. Accounting is separate: under AASB 16 the lessee recognises a right-of-use asset and a lease liability, so depreciation and interest replace rent in profit and loss, unless the short-term or low-value exemption applies. If the ATO treats the arrangement as a sale rather than a lease, a hire purchase for example, the lessee's deductions change to depreciation plus interest.

For the lessor, rentals are assessable income, depreciation is claimed under the capital allowances rules, GST is charged on the rentals and remitted, and selling the asset at the end can trigger GST and a balancing adjustment. Lessors need contracts that clearly evidence a genuine lease, with residual value, maintenance and insurance obligations spelled out.

Vehicles are where this gets expensive. If an employer leases a car and an employee uses it privately, a car fringe benefit arises. The taxable value is worked out under either the statutory formula method, based on the car's base value, the current statutory percentage and the days it was available, or the operating cost method, based on actual running costs less employee contributions. The operating cost method can produce a lower figure but demands a representative logbook.

Keep the signed contract, tax invoices showing the GST on each rental, odometer readings and logbooks, insurance certificates and end-of-term disposal records, generally for at least five years after the relevant return. The usual mistakes are claiming input tax credits for private use or without a valid tax invoice, sloppy FBT records, and contract terms that make the deal look like a disguised sale.