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Operating lease, finance Lease – they’re similar but different

Leasing has long been a great way for businesses to get their hands on the vehicles they need to keep themselves on the road and the wheels of business turning efficiently. Finance leases and operating leases have proven particularly popular for businesses looking for cost effective vehicle leasing.. In many ways they’re similar, both offer the budgeting benefits of a fixed monthly payment that help your cash flow, but what happens at the end of those leases is what largely sets them apart.

So, what are the features of both?

Finance Lease

When you take out a finance lease the lessee, or finance company, will purchase the vehicle which you then lease from them for a set time in return for rental payments. At the end of the lease after making the final payment the vehicle is yours to keep.

Those rental payments remain fixed, which is great for budgeting, and it’s your responsibility to maintain the vehicle. Each Finance Lease requires a residual value which is determined by the guidelines as set by the Australian Tax Office and is based on the term (months) that the contract runs. At the end of the contract you may choose to refinance the residual value for a further term, alternatively you can pay out the contract and sell the vehicle, remembering that your residual value is a fixed value payable to the finance company. If you sell the vehicle for more that the residual value, then you keep any additional cash.

There are tax benefits to be had from a finance lease. The residual value and those regular payments are subject to GST, so you can claim the GST as input credits on your next BAS. If the amount financed is below the depreciation limit you can claim a tax deduction on those rental payments.

A finance lease can be a great way to keep your fleet up to date with the latest vehicle technology if you choose to renew your vehicle at the end of the lease, rather than keeping it.

Operating Lease

The big difference between an operating lease and a finance lease is that with an operating lease the lessee leases you the vehicle for a fixed time and number of kilometres while you pay a fixed rental for it. At the end of the lease the vehicle is given back without any extra costs if it’s in fair condition and the kilometres haven’t been exceeded. What that vehicle’s worth at that stage is not your risk, because the lessee takes all the risk on the residual value.

An operating lease shares one great advantage of a finance lease ­– straightforward budgeting thanks to that one fixed tax-deductible monthly payment.

What about running costs, then? Well an operating lease can either be “fully maintained”, where the lessee takes care of all your running costs, or “non-maintained”, in which case it’s your responsibility to look after regular servicing, tyres, fuel and maintenance. Fully maintained leases are the most common, allowing you to leave all the ongoing management of the vehicle to the leasing provider. This is where it’s important to choose a lessee that is also a fleet management organisation, like Fleetcare.

Need to know more about finance or operating leases? Call Fleetcare today on 134 333 for an obligation-free chat about your fleet financing needs.

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