Equipment leasing is utilised by business entities to acquire a range of plant, equipment and machinery used in the daily operations of the enterprise. The type of equipment that may be leased can range from computers and office furniture, to motor vehicles, excavators and sophisticated mining machinery and medical equipment.
Essentially, equipment leasing is an alternative to the outright purchase of equipment or to obtaining a loan to acquire the asset.
A lease agreement is a legal contract whereby the lessee ‘borrows’ the equipment from the lessor for a specified term in exchange for regular fixed payments. The lessor remains the owner of the equipment and may terminate the agreement if the lessee breaches an essential term.
As with any legal transaction, it is important to understand the terms and conditions upon which you are agreeing. Equipment lease agreements can vary significantly. Company officers and business owners should consider the full financial outlay over the term of the agreement, responsibilities for repairs and maintenance, insurance obligations, any restrictions placed on use of the equipment and, what happens at the end of the lease. For example, lease payments may be structured so there is a residual balance due at the end of the term with an option to purchase the asset.
There are a number of benefits in using an equipment lease to finance large assets:
- Companies are able to obtain the use and benefit of essential plant and equipment with little capital outlay, freeing up cashflow for other aspects of the company’s operations.
- Equipment under lease can generally be upgraded more frequently (at the end of the lease term) to take advantage of opportunities to increase productivity and efficiency in line with technological advances.
- Because equipment is turned over more frequently there may be less maintenance and repair costs.
- Lease repayments are usually fixed over the term of the lease, providing certainty which assists with budgeting and cashflow forecasting.
- Equipment leases can be tax effective – provided the equipment is used to generate income for the company, payments are generally partly or fully tax deductible. When equipment is purchased outright or through traditional loan arrangements, tax deductions may only be available on a depreciation basis or on the interest portion of the loan repayments.
Of course, leasing arrangements can also have pitfalls. The overall costs are generally higher than purchasing the equipment outright, the equipment cannot be used for collateral and, unless an asset is purchased at the end of the term, the company does not acquire equity in it, despite having made ongoing payments. Companies should also consider the term of the lease and whether the equipment is likely to become obsolete during that time should the company change its operations. In such cases, unless the lease agreement provides otherwise, the company will be liable for the full payment under the lease.
The Personal Property Securities Act 2009 (Cth) (PPSA) provides a national framework for lessors to register a security interest in a lease agreement. The interest is recorded on an electronic central register known as the Personal Property Securities Register (PPSR) and provides notice to third parties of the lessor’s interest in the property.
Many commercial leasing arrangements are considered security interests for the purposes of the PPSA.
Registration on the PPSR is integral to secure, protect and enforce a lessor’s financial interest in property. To register an interest, a complying security agreement is prepared which provides for the ‘attachment’ of the interest to the asset and the rights of the lessee to deal with the property during the term of the agreement.
Lessors and lessees entering an equipment lease should ensure all terms and conditions are appropriate and conducive to the organisation’s financial and legal objectives, and their interests adequately protected under the agreement.