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What is an Operating Lease?

An Operating Lease is an off balance sheet option to lease a motor vehicle.  The finance provider purchases the motor vehicle and rents it to the person for a monthly rental payment.

At the end of the Operating Lease term, the vehicle is simply returned to the finance provider in good condition at which time the finance obligation ends.

How does an Operating Lease work?

An Operating Lease is simple, choose a vehicle, decide on the term, (normally 3 to 5 years) work out how many kilometres you will travel per year.  Pay a monthly lease payment and the end of the term, hand the vehicle back to the financer provider.

Operating Lease Features

  1. Operating Lease terms range from 2 to 5 years
  2. The fixed Operating Lease rentals are on a single monthly invoice allowing easy and accurate budgeting
  3. The Operating Lease monthly repayment may be 100% tax deductible
  4. No capital outlay is required to fund the purchase of the vehicle
  5. The vehicle is funded externally and not shown on the balance sheet
  6. There are no costs or liability associated with the vehicle disposal


Possible Operating Lease Taxation Implications

If the amount to be financed is below the ATO depreciation limit, (currently $57,180) you may claim the full lease rental as a tax deduction.  Above the depreciation limit, it’s similar to a commercial hire purchase agreement where the interest and depreciation up to the vehicle’s value can be claimed.

GST will be charged on the monthly payments; however it can be claimed back on the Business Activity Statement (BAS) over the term of the Operating Lease.

The monthly repayment or balloon amount is subject to GST.

Who does an Operating Lease suit?

An Operating Lease suits someone who is going to use a vehicle predominately for business use, therefore this vehicle financing product is used by companies, trusts, sole traders, partnerships and ABN holders.


* Information contained within this article is correct at time of writing and is general information only. This should not be taken as financial advice.

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