Finance Leases are a financial solution used to finance 100% of an equipments value.
Legally, Komatsu Corporate Finance is the owner/lessor of the equipment while the customer is the Lessee.
To qualify as a "genuine lease" for Income Tax purposes the Lessee can not have an option to purchase.
At the end of the lease there is a residual value which is guaranteed by the Lessee.
The residual value represents an estimate of what the market value of the equipment might be
on the expiry of the lease. Thus, a nominal residual value of nil or $1 is not generally allowable.
The accounting and taxation treatment of a Finance Lease can be summarized as follows:
QUESTION
|
ANSWER
|
Is it on or off the Lessee's balance sheet ?
|
On balance sheet
|
What portion of the rentals are expensed for Australian Accounting Standard purposes?
|
The interest component of each rental is expensed, while the capital portion is amortized.
|
What proportion of the rental is tax deductible ?
|
Where Division 240 and Division 16D of the Income Tax Assessment Act do not apply, the full rental (excluding GST) should be tax deductible to the Lessee for Income Tax purposes.
|
Are up front deposits allowable ?
|
No. In order to comply with Australian Tax Office requirements.
|
Must there be a residual value ?
|
Yes. In order to comply with Australian Tax Office requirements the
residual value must represent a fair estimate of the market value of the leased equipment
at expiration of the lease.
|
When is Goods & Services Tax payable ?
|
GST is paid with each rental and the Residual Value.
|
Any other limitations ?
|
The lease term must be less than 75% of the equipment's useful life for Income Tax purposes. Also, AASB 117 "Leases" requires substantially all the risks and rewards incidental to ownership of the leased equipment to be transferred to the Lessee.
|
What happens at the end of the lease ?
|
Legally, the equipment should be returned to the Lessor after which the equipment would be auctioned.
If the net sales proceeds exceed the residual value, that surplus would be rebated to the Lessee.
The Lessee would record that surplus amount as taxable income.
If the net sales proceeds are below the residual value, the Lessee must pay that shortfall to the Lessor.
The Lessee would claim a tax deduction for that shortfall amount.
However, if on expiry the lessor agrees to transfer title of the equipment to the Lessee in return for full
payment of the residual value, the residual value becomes the Lessee's equipment cost for depreciation purposes.
|
The accounting and taxation treatment of financial products is subject to change. We
strongly recommend that you seek independent advice from your taxation and accounting adviser. Please
refer to the Terms and Conditions of Use of this Web Site.
Calculator