What should you know about leasing? A lease is an agreement or contract giving someone (the lessee, ie. you) the right to use, for a set time, property legally owned by someone else (the lessor). The cost is a series of rental payments.

The lease tells you how long you can use the equipment for, how much you pay, how often you pay and the residual value of the equipment (this is the estimated market value of the equipment at the end of the lease period). The interest rate and repayments are usually fixed for the term of the lease.

When the leased equipment is used for business, a tax deduction applies. The best bit is the cost is fixed and won’t change over the period, which helps predict your cash flow. When the lease ends, a residual or leftover value is calculated according to Australian Tax Office guidelines.

How does leasing work?
Any piece of equipment such as vehicles, furniture, technology or heavy machinery that is used to produce income can be leased. The cost of the lease can be claimed as a tax deduction. If you’re new to business, you may feel conspired against because you don’t have as firm a grasp on leasing as you think you should.

You, the lessee, choose what equipment you want to use, as if you were buying it yourself. Once you agree with the supplier on the terms of purchase, the lessor draws up the lease agreement specifically for the equipment you are buying. The lessor then buys the equipment, and you have the right to possess and use it.

As soon as delivery of the equipment is confirmed with the lessor, the lease goes into effect, and you begin your payments as set out in the lease. Delivery and installation costs on the equipment can be included in the lease amount.

So what’s the point?
You get to use the equipment without having to find the purchase price (or deposit). Your capital is freed up to use elsewhere in the business. Because repayments are fixed, leasing also helps with your cash flow planning.

When inflation is high, there is another advantage of leasing over buying an asset – it acts as a hedge against inflation because your cost of using the equipment is fixed at the time your lease begins, despite prices and interest rates.

Tax advantages
If the equipment you lease is used to produce income, the payments are fully tax deductible. You may also reap tax benefits available to the owner of equipment if you are the lessee.

The downside
You don’t own the equipment while you are paying the lease. There is no guarantee you can buy the equipment at the end of the lease, although the lessor generally accepts the residual value as payment.

Leasing property
Have a solicitor look over any lease before you sign. These are the things to look out for in that lengthy document that the landlord’s solicitor presents to you. This lease will contain many clauses that haven’t even been talked about between you and the landlord.

Even if you’re told that the lease you are given is a standard lease, get a solicitor to help you negotiate the terms. Problems occur frequently with leases and you need to watch out for the things mentioned below.

Lease issues to consider

• How long does the lease run?
• What rent am I paying?
• Can this rent change if my turnover, gross profit etc changes?
• Can I renew this lease? Do I have to tell the landlord before the lease expires that I want to renew? Often you have to give the landlord six months written notice that you want to renew
• Who pays the council rates and taxes on the property I am proposing to rent?
• Do I have to contribute to costs such as cleaning the building, security and maintenance of such things as air conditioning? There can be a clause in the lease agreement called an ‘outgoings’ clause, which specifies these costs. In some states the landlord is required to give you a statement of outgoings with the lease.
• Who pays property insurance? The clauses in a lease about insurance can be long and complicated. That’s why it’s important for an expert to check out the lease on your behalf.
• Can I transfer this lease if I sell my business before the lease expires? This is important because if you want to sell your business you’ll need to be able to transfer the lease to a new owner.
• Can I sub-let part of the premises I rent?
• If there is a have a problem, where do we go to help get the dispute resolved?
• I want to sell live pigs in my shop? Can I do this under the lease? Are there any other restrictions?
• Have you checked to make sure you the government or council will let you run a business that sells live pigs? Do you need permits? Check these things before you sign.
• What happens if the centre or complex is being renovated? Sometimes there is a clause in the lease which says you must pay rent during this time. Don’t sign a lease if it has such a clause!
• What if the lease requires me to personally guarantee I will make payments if the business fails? Be careful here. If, as a director of the company you are forced to give one, don’t let them make your spouse give a personal guarantee as well.

Tip
Before you enter into any kind of leasing arrangement, ask your accountant to check out your circumstances to see what type of leasing arrangement is the most tax effective.

By Peter Switzer, published on 28/10/2008

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