A finance lease lets you use an asset with fully deductible payments, then purchase it at the end by paying the residual. Here's everything Australian businesses need to know.
Under a finance lease, the financier (lessor) purchases the asset and leases it to your business (lessee) for an agreed term. You have full use of the asset throughout the term. At the end, you pay a residual value (set at inception) to take ownership — or you can refinance, trade, or return the asset.
Unlike a chattel mortgage, the financier legally owns the asset during the lease. This means:
The ATO sets minimum residual values for finance leases to prevent disguised purchases. These are a percentage of the asset's original cost:
| Lease Term | Minimum Residual (% of Cost) |
|---|---|
| 1 year | 65% |
| 2 years | 45% |
| 3 years | 35% |
| 4 years | 25% |
| 5 years + | 20% |
You can set the residual higher than these minimums, but not lower. A higher residual reduces your regular payments but means a larger payout at the end.
Our calculator factors in ATO minimum residuals and shows your exact payment with tax deductions.
Open Calculator →Each lease payment is 100% tax-deductible as a business expense. This simplifies your accounting — there's no need to separately track interest and depreciation.
GST is included in each lease payment and can be claimed as an input credit on your BAS each period. For non-GST-registered businesses, this is a non-issue — but for GST-registered businesses, note that you claim GST gradually rather than all upfront.
The financier owns the asset, so they claim depreciation — not you. This simplifies your tax return, but it also means you can't access the instant asset write-off under a finance lease.
Tax treatment depends on your individual circumstances and current ATO rules. Consult a qualified tax professional.
| Pros | Cons |
|---|---|
| Payments fully tax-deductible | No depreciation or instant asset write-off |
| Lower regular payments (due to residual) | Mandatory residual — lump sum at end |
| Can be off-balance sheet | Don't own asset during term |
| GST claimed gradually, not upfront | Less beneficial for GST-registered businesses vs CM |
| Flexible end-of-term options | ATO minimum residuals limit flexibility |
| Simple tax treatment | Early termination can be costly |
A Brisbane courier company leases a delivery van for $55,000 (ex-GST) on a 4-year finance lease at 7% with a 25% residual:
| Asset Price (ex-GST) | $55,000 |
| Residual (25%) | $13,750 |
| Monthly Lease Payment | ~$1,080 + GST |
| GST Claimed Per BAS Quarter | ~$324 |
| Annual Lease Deduction | ~$12,960 |
| End of Term: Pay Residual to Own | $13,750 + GST |
Illustrative only. Use our calculator for personalised estimates.
See repayments, residual, and compare with chattel mortgage — free.
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