The choice between the two will depend on which option maximises the company's tax deduction. This is turn will depend on the term and the depreciation rate allowable on the equipment.
The customer can structure the payments so that nothing is owing at the end of the term or a small ‘balloon' payment (like a ‘residual' in a finance lease) can be used to offset and reduce monthly payments.
- Unlike a finance lease, no restrictions apply to term structures.
- Tax ownership lies with lessee – interest expense and depreciation are claimed.
- For those on the ‘cash' method of accounting, GST is claimed and amortised over the duration of the loan period.
- Amount financed inclusive of GST – interest expense is therefore higher.