When you lease plant or equipment, the financier actually buys the asset on your behalf and leases it to you. The business obtains a tax deduction for the lease rental payments, whilst the finance company or bank providing the lease retains ownership of the item, and is able to claim depreciation.
You can select the term of the lease (usually 1-5 years) and the frequency of repayments. Most leases are calculated monthly in advance but other structures such as a ‘seasonal payment program’ can be implemented. This is particularly helpful for primary producers etc who may have ‘three big months’ and limited income for the rest of the year.
A residual amount is assigned to the lease according to taxation guidelines, which is based on the useful life of the asset. At the end of the lease period, whilst the financier has the right to take possession of the equipment and sell it in the open market, most lessees do end up acquiring the equipment themselves.
For accounting purposes, assets financed under a finance lease are brought onto the balance sheet, as is the corresponding lease liability.