Calculate lease payments, total lease cost, and buyout amounts for Australian commercial property leases, equipment leases, and operating leases.
| Item | Value |
|---|
A lease payment covers two components: the depreciation cost (the fall in asset value during the lease term) and the financing cost (interest on the outstanding asset value). Unlike a loan that pays off the full purchase price, a lease only amortises the expected depreciation portion — hence the lower periodic payments compared to a purchase loan.
| Feature | Finance Lease | Operating Lease | Purchase Loan |
|---|---|---|---|
| Ownership at end | Optional (pay residual) | Asset returned | Yes |
| Residual/balloon | Yes — set at start | N/A | No |
| Balance sheet treatment | On balance sheet (asset + liability) | Off balance sheet (pre-AASB 16) | On balance sheet |
| Monthly payment | Lower (residual deferred) | Lowest | Higher |
| Tax treatment (business) | Depreciation + interest deductible | Payments deductible | Depreciation + interest deductible |
| Scenario | Term | Residual | Rate | Monthly Payment |
|---|---|---|---|---|
| No residual | 5 years | $0 | 8% | $2,028 |
| 20% residual | 5 years | $20,000 | 8% | $1,797 |
| 30% residual | 5 years | $30,000 | 8% | $1,660 |
What is the difference between a finance lease and an operating lease?
A finance lease is economically similar to a purchase — you bear the risks and rewards of ownership, can purchase the asset at residual at lease end, and it appears on your balance sheet. An operating lease is more like renting — you use the asset and return it at the end, and historically could be kept off balance sheet. Under AASB 16 (effective 2019), most operating leases must now be recognised on the lessee's balance sheet.
What is a residual value on a lease?
The residual value (or balloon) is the agreed remaining value of the leased asset at the end of the lease term. Lease payments cover only the difference between the purchase price and the residual. A higher residual means lower monthly payments but a larger lump sum at lease end — which must be paid, refinanced, or covered by selling/returning the asset.
Should I lease or buy business equipment in Australia?
Leasing offers lower initial cash outlay, preserves working capital, and lease payments are generally fully deductible for business use. Buying builds equity and may be cheaper long-term if you plan to use the asset for many years. The ATO's instant asset write-off may make immediate purchase more tax-effective than leasing for eligible small businesses. Compare total cost of ownership over the full useful life.