Operating Lease Finance

An operating lease is a commercial finance product that enables a financier to purchase energy efficiency equipment and then rent it to a business.

The business pays regular installments to the financier. As the installments are considered rental payments, the business does not own the asset. Once the final lease payment has been paid, the business takes ownership of the energy efficiency equipment.

Operating Lease Finance may be a good fit if your business:

  • does not require ownership of the asset
  • requires less upfront cost
  • requires a tax-deductible option
  • needs to investigate the viability of equipment before purchase
  • you need to upgrade energy efficiency equipment (An example list of energy efficient equipment can be found on the Clean Energy Finance Corp website)

How it works

The customer enters an operating lease agreement with a financier.

  • The financier purchased the equipment.
  • The equipment is rented for regular payments.
  • The rental payments are treated as an operating expense and therefore tax deductible.
  • At the end of the lease, the customer can extend the lease, purchase the equipment, pay market value or return it.
  • The financier owns the asset resulting in an off-balance sheet finance arrangement for your business. The business pays installments back to the financier which may be deductible at the company tax rate. Note that the change to the Australian Accounting Standard resulted in all operating leases coming on-balance sheet as of 1st January 2019. It’s important to seek specific advice from your tax professional. 

A good place is to contact your bank directly and ask about their energy efficiency operating lease options

Loans amounts are between $7500 and $5 million. Contact your bank to understand their amounts. 

Terms range between one to seven years depending on the type of loan, bank and amount.

The interest on the rental payments may be tax deductible. Please seek advice from an accountant for more information.

Advantages

  • Most major banks and financiers offer Operating Lease Finance. Currently some financiers provide concessional finance for energy efficiency equipment upgrades. For more information visit the CEFC website
  • No upfront capital or security. Operating leases may allow energy efficiency projects to be undertaken without a business requiring up-front capital or using existing business assets as security
  • Save money straight away. Businesses that use finance for their energy efficiency projects can realise immediate cash flow benefits. Energy efficiency projects can result in higher savings than loan costs

Disadvantages

  • Project risk. As the business is considered the owner of the asset, the business bears the risk associated with owning the asset
  • Size and length limitations. Leases have a minimum project cost as well as a maximum length of around seven years.
  • There are no specialised benefits. Unlike other options, they don’t guarantee things like performance or maintenance of equipment
  • Creditworthiness. Your business's creditworthiness may have an impact on finance availability and rates which are offered. 

More information

Businesses can also receive a discount on energy efficient products that are installed by accredited Victorian Energy Upgrade providers. For more information visit the Victorian Energy Saver's energy advice for business webpage

Want to know more? Get in touch with:

Vivek Kotak

Sustainable Finance Lead

+61 3 8626 8781

vivek.kotak@sustainability.vic.gov.au

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Correct as at January 2018.

Sustainability Victoria
Level 28, Urban Workshop,
50 Lonsdale Street, Melbourne VIC 3000
Phone (03) 8626 8700
sustainability.vic.gov.au
Published by Sustainability Victoria.
Sustainable Finance – Operating Lease
© Sustainability Victoria January 2018

Disclaimer: The information provided in this document is general advice only. It does not take into account your particular needs or objectives and does not constitute legal or accounting advice. Accordingly, any comments or statements made are not a recommendation that a particular course of action is suitable for you and you need to seek your own legal, tax and accounting advice in relation to your specific circumstances.

This information is true and correct as of January 2018