Definition: Operating Lease - Any lease that is not a capital lease. These are generally used for short-term leases of equipment. The lesee can acquire the use of equipment for just a fraction of the useful life of the asset. Additional services such as maintenance and insurance may be provided by the lessor.

Notes: Such a lease need not be shown on the balance sheet of the lessee. Usually the lessor has taken a significant residual position in the lease pricing and, therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return. True operating leases can be 100% tax deductible. This means that all monthly payments can be written off as an expense and the equipment does not need to be depreciated over a term of years.

This method is becoming by far the preferred method of financing for companies.

Operating lease payments can include the running costs or operational costs of the item/product or vehicle.

The fixed monthly cost of hardware plus the ongoing maintenance costs. i.e. in a vehicle it could include such items as petrol, registration, tyres etc. On a multifunction device/copier or printer it could include all service, maintenance and toner supplies. For a telephone system it could include the cost of calls.

The term may vary between 1 and 5 years and the interest rate is fixed for the term of the contract.

The residual risk of the item/product or vehicle always remains with the financier. The Lesee never owns the goods. One merely rents the goods from the finance company. At the end of the term, the Lessee has a number of options.

The Lesee could elect to:

i) keep renting the item

ii) return the item to the lessor (finance company)

iii) make an offer to the lessor to purchase the item/product/vehicle at a fair market value

iv) upgrade the item/product or vehicle and maintain the payment structure (given the rates and market conditions
    at the time)

The many advantages of an Operating Lease:

● Repayments are an off balance sheet item

● One payment covering all running costs of the vehicle - easy accounting

● No residual risk

● Better cash flow management

● No technology obsolescence

● Upgrade options

● Capital budget approvals not required

● Bundle software, service and maintenance in one monthly payment

Generally, contracts are structured with regular monthly payments. This makes it easy for clients budgeting.
Finance companies prefer these payments to be made via a direct debit from your bank account.

You must be careful to ensure that the term of your contract is in line with the depreciation schedule for each item as set out by the Australian Taxation Office. Please refer to Rent Lease Group for the terms on each specific item. For further information email or call Rent Lease Group on 1300 309 806.

This saves you:

• Late payment fees and charges

• Additional interest

• Saves the finance company from chasing people each month for payment

These payments also vary depending on the term, the residual if any (the final agreed value payment or percentage of the purchase price), and the duties/taxes applicable to each state.

Rent Lease Group can structure the payment to suit the needs of each business by either varying the length of the contract.

When selecting your finance broker you must also be careful that they stick to the letter of the law with regard to these items. If not, the onus of taxation and liabilities falls on YOU, the holder of the contract.

The definitions of the finance products listed here are very broad, before entering into any contract we recommend you seek independent advice from your accountant. This will ensure you choose the right product for your requirements.