A finance lease is the financial solution when you wish to finance 100% of the equipment value.
Komatsu Corporate Finance is the legal owner or Lessor of the equipment and the customer is the Lessee. To qualify as a "genuine lease" for income tax purposes the lessee does not have an option to purchase the equipment.
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. A nominal residual value of nil or $1 is not generally recommended.
Frequently asked questions about the accounting and taxation treatment of a Finance Lease
Q: Is it on or off the Lessee’s balance sheet?
A: On the balance sheet.
Q: What portion of the rentals is expensed for Australian Accounting Standard purposes?
A: The interest component of each rental is expensed, while the capital portion is amortized.
Q: What proportion of the rental is tax deductible?
A: 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.
Q: Are up front deposits allowable?
A: No, in accordance with Australian Tax Office requirements.
Q: Must there be a residual value?
A: 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
Q: When is Goods & Services Tax payable?
A: GST is paid with each rental and the Residual Value.
Q: Are there any other limitations?
A: 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.
Q: What happens at the end of the lease?
A: Legally, the equipment should be returned to the Lessor after which the equipment would
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.
’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.