Lease vs Purchase Basics

The moment usually arrives at the dealership: the machine is chosen, the price is agreed, and then comes the question — cash, finance or lease? The salesperson has a confident answer, usually delivered with a line about tax deductions. It is a bigger decision than the last five minutes of a sale deserve, because the structures differ in who owns the asset, how the payments are treated, and when any GST can be claimed.

Four common paths to the same machine

• Buying outright — you pay, you own it, the business generally depreciates it. Simple, but it consumes cash on day one.
• Chattel mortgage — a loan secured against the asset. You own it from the start; the lender holds security until repayment. Repayments are part principal, part interest.
• Hire purchase — you hire the asset under an agreement that passes ownership at the end, usually after a final payment.
• Lease — the financier owns the asset and you pay for the use of it. At the end of the term there may be a residual to pay if you want to keep it, but during the lease it is not yours.

Ownership drives most of what follows in the accounts: an owned asset is generally depreciated with interest claimed separately, while payments for a genuinely leased business asset are generally treated as an expense of using it. Contract labels do not always match the substance, so the document itself matters more than what it was called across the desk.

GST timing is not the same across the options

This is where the structures quietly diverge. Under a chattel mortgage, a GST-registered business may be able to claim the GST on the full purchase price in the tax period of the purchase, depending on its GST accounting basis. Under a typical lease, GST is generally claimed progressively on each lease payment rather than upfront. Hire purchase has its own timing rules. None of this should be taken from a brochure or this article — the right treatment depends on the specific contract, your registration and your accounting basis, so confirm it for your agreement before signing, not after.

Cash flow versus ownership

Leasing and financing preserve cash, often the scarcest resource in a growing business. Buying outright avoids interest and leaves you with an asset you can sell, but ties up money that might earn more elsewhere. Balloon and residual payments deserve particular attention: a lower monthly payment in exchange for a large payment at the end is not a discount, it is a deferral — and the end of the term arrives whether or not the cash is ready.

The tax tail should not wag the dog

A deduction is a percentage back on money you have genuinely spent — it never turns a bad deal into a good one. What should decide the structure is the total cost over the term, the interest and fees, how long you will keep the asset, and what the arrangement does to your cash flow. Tax treatment is one input, not the answer.

What we commonly see go wrong

• Signing whichever structure the dealer suggested, without comparing total cost of the alternatives over the full term.
• Assuming a vehicle lease is fully deductible despite significant private use.
• GST claimed upfront on an agreement that turns out to be a lease, then unwound later.
• A balloon payment arriving at the end of the term with no plan for it, forcing a refinance on poor terms.
• The contract never reaching the accountant until after it is signed, when the useful questions can no longer change anything.

A worked example

As an illustration: a courier business leases a van because the payments were described as fully deductible. The payments are indeed claimed as they go — but at the end of the term the business owns nothing, faces a residual payment to keep the van, and discovers the total paid over the term exceeds what a chattel mortgage over the same period would have cost. The deduction was real; the comparison was never done. The structure was chosen for the tax line, not the total cost.

When to get help

The best time to ask is before signing — a short conversation comparing total cost, GST timing and cash flow is cheap relative to the term of the contract. If you have already signed and are unsure how the agreement should be treated, send the contract itself, not a description of it.

Are lease payments always tax deductible?

Not automatically. Payments for a genuinely leased asset used in the business are generally deductible to the extent of business use, but private use reduces the claim, and some agreements labelled as leases are treated differently in substance. Have the specific contract reviewed rather than relying on the label.

Can I claim all the GST upfront when I finance equipment?

It depends on the structure and your GST accounting basis. Under a chattel mortgage a registered business may be able to claim the GST on the purchase price in the period of purchase, while under a typical lease GST is generally claimed on each payment. Confirm the treatment for your actual agreement before lodging.

Which option is best for tax?

There is no universal answer, and tax should not be the deciding factor on its own. The better question is which structure has the lowest total cost over the term and fits your cash flow — the deductions follow the structure, they do not rescue a poor one.