A finance lease lets your business use a vehicle or piece of equipment without buying it outright. The financier owns the asset, your business pays a fixed rental over an agreed term, and a residual (the lease’s end value) is set at the start. It is one of four common ways Australian businesses fund plant, machinery and work vehicles — and for some businesses it is the cheapest way in.
The short version: with a finance lease the financier buys the asset and leases it to you. You pay rent, not a loan repayment. GST is claimed on each rental rather than upfront. At the end of the term you pay the residual, refinance it, or hand the asset back — depending on the agreement. If you want to own the asset from day one instead, look at a chattel mortgage.
Apply in 60 seconds or talk to a broker about which structure suits your business.
What a finance lease actually is
A finance lease is a rental arrangement with a purpose: you get full use of the asset for the term, and the lease is structured so that the rentals plus the residual cover the financier’s cost.
- The financier owns the asset. Your business is the lessee and has the right to use it.
- You pay a fixed rental — typically monthly, over one to five years.
- A residual is set at the start. This is what the asset is deemed to be worth at the end of the term.
- You carry the operating risk. Registration, insurance, servicing and running costs are usually yours, not the financier’s.
That last point is what separates a finance lease from a true operating lease, and it is where most of the confusion sits.
Finance lease vs operating lease
Both are leases. The difference is who carries the risk on what the asset is worth at the end.
| Finance lease | Operating lease | |
|---|---|---|
| Who owns it | Financier | Financier |
| Residual risk | Usually yours — if the asset sells for less than the residual, the shortfall is generally your problem | The financier’s — you hand it back at term end |
| Running costs | Your business | Often bundled (maintenance, rego, tyres) depending on the product |
| Term end | Pay the residual, refinance it, or sell the asset and settle | Return the asset, extend, or upgrade |
| Best for | Assets you intend to keep and use hard | Assets you want to cycle every few years without owning |
In practice, most equipment leases written for Australian trade and transport businesses are finance leases. Genuine operating leases are more common for fleets of light vehicles and for specialist gear that dates quickly.
Finance lease vs chattel mortgage vs commercial hire purchase
These four structures fund the same assets and quote similar monthly numbers. What differs is who owns the asset, when you get the GST back, and what your accountant can claim.
| Finance lease | Operating lease | Chattel mortgage | Commercial hire purchase | |
|---|---|---|---|---|
| Owns the asset during the term | Financier | Financier | Your business | Financier (title passes at the end) |
| GST on the asset | Claimed progressively on each rental | Claimed progressively on each rental | Claimed upfront on the purchase price | Claimed upfront on the purchase price |
| Typically deducted | The lease rentals | The lease rentals | Depreciation + the interest portion | Depreciation + the charges portion |
| Residual / balloon | Yes, set at the start | Yes, but the financier wears it | Optional | Optional |
| Ownership at term end | On payment of the residual | No — asset goes back | You already own it | Yes, automatically |
The GST row is the one that changes cash flow most. On a $220,000 excavator, a chattel mortgage can put roughly $20,000 back on your next BAS; a finance lease spreads that same credit across the rentals instead. If the up-front GST refund matters to your working capital, that alone can decide the structure.
For a longer walk-through of the three purchase-style structures side by side, read chattel mortgage vs lease vs hire purchase.
GST, tax and your balance sheet
Three things are worth getting straight before you sign.
GST
Under a finance lease you generally claim the GST contained in each rental on the BAS for that period, rather than claiming the GST on the asset price at settlement. Whether you claim on a cash or accruals basis affects the timing.
Deductions
Where the arrangement is a genuine lease, the rentals are typically deductible to the extent the asset is used to produce assessable income. That is different from a chattel mortgage, where you claim depreciation on the asset plus the interest component of the repayment. Which produces the better outcome depends on your asset, your turnover and your effective life — it is an accountant’s call, not a broker’s.
Balance sheet
Businesses that prepare general purpose financial statements apply AASB 16, which puts most leases longer than 12 months onto the balance sheet as a right-of-use asset and a lease liability, with short-term and low-value leases excluded. Plenty of small businesses prepare special purpose accounts and do not apply AASB 16. If your lender, bonding provider or head contractor looks at your balance sheet, ask your accountant which treatment applies to you before you choose a structure.
Depreciation-based structures also interact with the small business write-off rules and, for cars specifically, with the car depreciation limit. Our guide to the instant asset write-off for tradies covers where those lines fall.
What happens at the end of a finance lease
The residual is not a surprise — it is agreed on day one. When the term ends you usually have three routes:
- Pay the residual and take ownership of the asset outright.
- Refinance the residual over a further term, which keeps cash in the business but extends the commitment.
- Sell or trade the asset. If it sells for more than the residual you are usually ahead; if it sells for less, you generally cover the gap.
That third scenario is the reason to be conservative about residuals on assets that depreciate quickly. A high residual makes the monthly number look attractive and quietly moves risk to the end of the term.
Who a finance lease suits
- Businesses protecting working capital. No deposit on the asset price and no large GST outlay at settlement.
- Businesses with lumpy cash flow that want a fixed, predictable monthly rental.
- Equipment that earns its keep — plant, machinery, trucks, trailers and fit-out where the asset will be used for the whole term.
- Businesses that expect to keep the asset and are comfortable paying out the residual.
It suits you less well if you want the asset on your books from day one, or if the up-front GST credit is the point. In those cases a chattel mortgage or commercial hire purchase is usually the better fit.
What lenders look at
A finance lease is assessed like any other commercial facility. Expect questions about:
- How long you have held the ABN, and whether you are GST registered
- The asset — type, age, hours or kilometres, and who is supplying it
- Your trading history, or a low-doc pathway if full financials aren’t available
- Existing commitments and how the new rental sits alongside them
- Whether a director’s guarantee is required
You can sanity-check the monthly number before you talk to anyone using our equipment finance calculator, or the chattel mortgage calculator if you want to see the ownership structure side by side. Both are estimates, not quotes.
Where a finance lease sits in your finance mix
A lease is one tool. Most growing trade and transport businesses run a mix — leases or asset finance for the gear that earns money, and a separate facility for the gap between invoicing and getting paid. If cash flow is the real constraint rather than the asset itself, look at business finance options alongside the lease rather than stretching the lease term to make the monthly number work.
Specific asset classes have their own considerations too — see equipment finance for how lenders treat different categories of plant and machinery.
Not sure whether to lease it or own it? That decision is worth ten minutes with someone who arranges both every day. Tell us the asset and the term and we’ll show you how the structures compare for your business.
Finance lease FAQs
Is a finance lease the same as an operating lease?
No. Both are leases and the financier owns the asset in each, but a finance lease usually puts the residual risk on your business, while an operating lease leaves it with the financier and you hand the asset back at the end of the term.
Can I claim the GST on a finance lease?
Generally you claim the GST contained in each lease rental on the BAS for that period, rather than claiming GST on the full asset price at settlement. This is the main cash-flow difference between a lease and a chattel mortgage.
Do I own the asset at the end of a finance lease?
Not automatically. Ownership usually passes only if you pay out the residual at the end of the term. Some agreements allow you to refinance the residual or sell the asset and settle instead.
What is a residual on a finance lease?
The residual is the asset’s agreed end-of-term value, set when the lease starts. A higher residual lowers the monthly rental but increases what you owe at the end, so it should reflect what the asset is realistically worth by then.
Can I get a finance lease with a new ABN or without full financials?
Often yes. Lenders assess ABN age, GST registration, the asset itself and your trading position. Where full financials aren’t available, a low-doc pathway may be an option depending on the lender and the asset.
If the asset is a truck specifically, our guide to how truck leasing compares to a chattel mortgage covers the truck-side questions — kilometre limits, return condition, bodies and attachments, and residual risk on a working truck.
Written and reviewed by the Finance Director at Tradie Finance.
This article is general information only and does not constitute credit, financial, tax or accounting advice. Tax and accounting treatment depends on your circumstances — speak to your accountant before choosing a finance structure. Tradie Finance operates under Australian Credit Licence 506065 (Five Tees Pty Ltd). Lending is subject to approval, lending criteria, terms, conditions and fees.