What is a vanilla lease?

You tell the lessor what asset you need and for how long. The quote is built from the asset cost, the expected residual and an implicit finance charge, and it sets out the payment amount, the frequency, the residual and any fees. The paperwork is short by design: lease amount, term, payment schedule, insurance responsibilities and end-of-term options.

The lessor buys or supplies the asset, you take delivery, and the rentals start. Because there is no indexation or usage charge to complicate matters, the payments stay predictable across the term. Unless the contract says otherwise, routine servicing and insurance are the lessee's job, so confirm that in writing before signing.

At the end you usually have three choices: hand the asset back, extend the lease at market rates, or buy it for a pre-agreed amount. Some vanilla leases include a nominal purchase option and some rely only on return or renewal, so read that clause rather than assuming ownership is on the table.

The rest of the negotiation is fine print. Ask how the end-of-term purchase price is calculated and whether it is fixed, who handles maintenance and insurance, what break fees apply if you end early, and whether any CPI or market indexation can lift the payments. Ask for the implicit lease rate so you can compare offers on the same footing, and get a payment schedule your accountant can apply under AASB 16.

Under AASB 16, a vanilla lease usually puts a right-of-use asset and a lease liability on the lessee's balance sheet, even though legal title stays with the lessor. The liability starts at the present value of future payments, using the rate implicit in the lease where the lessor provides it, or your incremental borrowing rate where it is not readily determinable. The right-of-use asset is then depreciated and the liability carries interest.

Lease payments for business use are commonly deductible, while the lessor claims the depreciation. GST is generally payable on the payments, and a GST-registered lessee can usually claim input tax credits. Vehicles available for private use can bring fringe benefits tax into it, and a lease to a consumer can instead be a regulated consumer lease under the National Credit Code, which ASIC administers, while a lease for business use sits outside that regime. Because deductibility turns on whether the contract is legally a lease, a hire purchase or a chattel mortgage, confirm the treatment with your accountant.