Lease agreements

Over the years, leasing of assets have taken on many different names and forms – hire purchase agreements, lease to buy, operating lease, finance lease, multi-lease to name a few. Most times, the variations are used in relation to motor vehicles more than other assets.

Financing Options

Broadly speaking, there are three financing options when an asset is acquired in the course of a business:

  1. Buying – purchase the asset outright from either cash available or by borrowing purchase funds from your bank;
  2. Renting – the lessee agrees to pay regular (usually monthly) payments to the lessor for the use of the asset over the term of the lease. It is often referred to as an “operating lease” in the context of motor vehicles;
  3. Financing – this option is by far the most common one since the purchase price of the asset is paid over the term of the lease while the asset is being used. Financing is usually provided by the lessor or a finance company simultaneous with the lease agreement

Tax Treatment

For tax purposes, substance overrides form so regardless of what the lease is called, the tax treatment of any lease agreement depends on the terms of the agreement entered into between the lessee and the lessor. These leases fall into two broad categories – operating leases and finance leases. Lease payments for operating leases are treated as expenses whereas finance lease payments are not.).
Any lease is a finance lease if one of the following applies:
  • The term of the lease is greater than 75 per cent of its estimated useful life; or
  • The asset is transferred to the lessee at the end of the lease term; or
  • The lessee has the option to buy it at the end of the lease term.
Even when the lease is established as a finance lease, the GST treatment differs for finance leases where the ownership of the asset is transferred over to the lessee on the final lease payment. The following table sets out both, the tax and the accounting treatment of the three common types of leases available for any type of assets:
Important: This is not advice. Clients should not act solely on the basis of the material contained in the Client Newsletter. Items herein are general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas.