How does an Operating Lease Work?
Under an Operating Lease Agreement, the lessor or financier acquires the equipment on their books and depreciates the asset over the useful life. The lessee (or customer) rents the equipment back and then simply hands back to goods at the end of the term.
Features of an Operating Lease Facility
Benefits of an Operating Lease Facility
Example of an Operating Lease Facility used for Drilling Rig Finance
- Purchase Price of new Casagrande Drilling Rig – $935,000 (gst inc)
- Finance Type – Operating Lease
- Loan Amount – $850,000 (client borrows the ex gst amount)
- Term – 60 months
- Residual – NIL
- Payments – monthly in advance
- Client could claim the full monthly payment as a tax deduction on their profit and loss – minimising tax paid to the ATO
- No residual payment to be paid at the end of the term which meant client could hand back the drilling rig at the end of the term
- Operating Lease allows client to upgrade to a new drilling rig at the end of term without having to worry about trading in an existing machine
- Under tax accounting principles, an Operating Lease is treated as off balance sheet borrowing, allowing client to reduce the liability position on their balance sheet
Who would use an Operating Lease Facility?
An Operating Lease facility is a form of financing heavy equipment, for businesses that need to upgrade to new equipment on a regular basis. If a business is using a machine whereby high usage will be incurred over the life of the asset, purchasing new equipment might be necessary in order to maintain regular business operations.
Heavy Vehicle Finance advises that all clients need to discuss a particular funding scenario with their Accountant before making a decision on what product to use when financing drilling rigs or any type of heavy equipment. There are many different tax implications that need to be discussed with a tax accountant before deciding whether or not an Operating Lease facility would best for the financial structure of the business.
To ask more questions about an Operating Lease Facility?
To discuss if an Operating Lease would suite your business, please call one of our Finance Consultants on 1300 788 740. One of our specialists Finance Consultants will be able to suggest the best product relating to your particular funding scenario. Or alternatively you could input your details into our online finance pre-approval for finance pre-approval.