120

MARKET REVIEWThree products dominate equipment capital expenditure inAustralia; lease, hire-purchase and chattel mortgage or securedloan (the latter grouped as non-lease). The products are offered aspart of a portfolio of equipment financing techniques by bothbank and non-bank providers. Non-bank providers include manywith a relationship to equipment manufacturers (captives).Customers include all private and public industry sectors.

FY2019 continued to see growth in the equipment financemarket with the non-lease segment making up the significantportion and the lease segment diminishing in aggregate foranother year. This contrasts with other parts of the internationalmarket – the US and UK in particular – and reflects the impactof government policy reflected in regulation (in particular taxlaws) and accounting treatment impacting the utilisation of thelease product.

While the tax-benefit transfer status afforded leasing bringspricing benefits, this has been outweighed by the treatment of thelease as a taxable-supply under Australia’s national consumptiontax – the Goods & Services Tax [GST].

This contrasts with the input-taxed chattel mortgage, forexample, with customers seeing it as a more attractive product inconsequence.

In line with the focus of the publication in which this articleis included, the balance of the paper focuses on the leasing com-ponent of equipment finance provided in Australia in FY2019.

Players in the leasing market. In Australia the main providersof lease finance were traditionallyfinance companies (including bank-owned lenders, general financiers andcaptives) and banks. Over the lastdecade nearly all the bank-ownedfinance companies have beenbrought into the parent.

More recently, while the bankshave been the predominant source oflease and other equipment finance,improved access to funding has seencaptives and independents improvetheir share.

Australia is also experiencingthe emergence of FinTech equip-ment finance providers heavilyreliant on digital processes to transactwith their customers.

The current market. Supportedby two decades of fiscal and struc-tural reforms, the Australian econ-

omy entered the 2007–09 Global Financial Crisis (GFC) withour national government having no debt and a budget in sur-plus. A recession was avoided as a result of a combination of arobust banking/financial sector prudential framework and abooming trade exposure to China, India and the rest of thedeveloping world, together with a large fiscal stimulus by thegovernment.

The monetary policy response to the GFC saw the cash ratereduced to 3% by April 2009. As the crisis passed, the continuingrise in Australia’s Terms of Trade reflected in substantial domesticsupply constraints and caused Reserve Bank concerns about infla-tion rising above its 2%–3% target range. Consequently, the Bankincreased the official cash rate seven times from 3% in October2009 to 4.75% until November 2010.

Demand subsequently eased due to a slowing of economicactivity in China and patchy local economic news outside of themining sector coupled with a significant decline in consumer sen-timent and business confidence.

Against this background monetary policy was eased in 12steps reducing the official cash rate to a historic low of 1.5% byAugust 2016 where it remained unchanged until June 2019.

In June 2019, Australia’s Reserve Bank decreased the cashrate by 25 basis points to 1.25 to support employment growthand provide greater confidence that inflation will be consistentwith the medium-term target.

The central scenario remains for the Australian economy togrow by around 2¾% in 2019 and 2020. This outlook is sup-ported by increased investment in infrastructure and a pick-up in

Australia

Table 1: Annual new business volumes

42.0

40.0

38.0

36.0

34.0

32.0

30.02012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19

A$bn

120-129:WLY 27/11/2019 09:08 Page 120

activity in the resources sector, partly in response to an increase inthe prices of Australia’s exports.

The main domestic uncertainty continues to be the outlookfor household consumption, which is being affected by a pro-tracted period of low-income growth and declining housingprices. Some pick-up in growth in household disposable incomeis expected and this should support consumption.

Equipment finance market data – lease and non-lease. Until1985 the only detailed time series of new leasing statistics was forfinance companies. From July 1991 an expanded lease finance sta-tistical series which included operating leases has been availablefrom the Australian Bureau of Statistics (ABS). This developmentfollowed representations and resources from (then) AELA;1 morerecently the Equipment Finance Division of the AustralianFinance Industry Association (AFIA).

From 2000, however, industry funding was discontinued infavour of data collected directly from members. This article drawson this, in graph and tabular form as appropriate.

AFIA estimates that as at end FY2019 total new equipmentfinance (including fleet leasing) was A$47.7bn (up from year endFY2018: A$47.2bn). Excluding fleet leasing, equipment financerepresented A$40.4bn (compared with year end FY2018A$40.3bn).

Of this A$8.7bn was finance leases, A$5.7bn was operatingleases (including fleets), A$1.9bn was hire purchase and A$31.3bnchattel mortgage.

Excluding the fleet leasing sector, 36% was for motor carsand light commercials, 18% for trucks, trailers and buses, 3% foraircraft and other transport equipment, 6% for agriculturalmachinery, 5% for EDP and office machines, 4% for manufactur-ing equipment, 14% for mining and construction and 13% forother items.

Net receivables have been showing growth since 2015, andto June 2019 grew to A$112bn from A$107bn in the previousyear.

Historical perspective. While the concept of leasing plantand machinery was not unknown pre-1950 in Australia, its rela-tively large-scale use and acceptance is only a phenomenon sincethat time. This growth was pioneered by finance companies in thelate-1950s and early-1960s. Since that time most financial institu-tions have moved to include leasing in their product range.

Lease finance utilisation rose strongly through the 1960sthrough to the 1980s as the acceptance of the philosophy of leas-ing broke down earlier attitudes against this non-equity form offinancing. In addition, from the early 1970s a more neutral taxsystem allowed leasing to compete more equally with otherequipment financing techniques.

The proportion of new private capital expenditure leasedpeaked in 1989/90 at around 30%. It subsequently eased to below20% in the recessionary early-1990s, due to a mix of taxationchanges and distortions, as well as business lack of confidence toundertake additional financing. In the period to 2000, the ratiosettled at around 25% reflecting the absence of any major taxdriver in that period.

Since the introduction of the GST in July 2000, however, thediffering GST treatments have clouded product comparisons and

utilisation has dropped back to approximately 18%. These statisticsand their pattern over time are further clouded by the impact of: • large leveraged lease transactions and occasional private and

public-sector sale-and-leasebacks and privatisations;• the volume of leases written for the public or government

sector; and • the treatment of operating leases.

In aggregate the lease and non-lease equipment financetogether continue to account for a significant and growing pro-portion of equipment capital expenditure.

In the early years most leases were motor vehicle-related andeven today around 50% of lease volumes are for motor cars,trucks, vans, motor buses and coaches. Aircraft, ships and heavyearthmoving vehicles comprise another sizeable end-use.

From the mid-1980s operating leases developed in impor-tance. Although no definitive statistics then existed, a survey con-

121

A U S T R A L I A

ASSOCIATION

AUSTRALIAN FINANCE INDUSTRY ASSOCIATION (formerly Australian Finance Conference [AFC]; Australian

Equipment Lessors Association [AELA]; Australian FleetLessors Association [AFLA]; Debtor & Invoice FinanceAssociation [DIFA])

Level 11 130 Pitt Street Sydney 2000 Australia Tel: +61 2 9231 5877 Email: info@afia.asn.au Website: www.afia.asn.au Directorate: Chief Executive Officer: Helen Gordon Executive Director Policy and Risk/COO: Karl Turner Associate Director Policy and Technology: Alex Thrift Executive Director Membership Engagement: Lorri Loca Membership Marketing Manager: Elle Buckley AFIA Equipment Finance Division Council Members 2018–19: Brandon Stannett (Chair), CNH Industrial Phil Chaplin (Deputy Chair), Thorn Group Trent Cummings/Michael Volkiene, ANZ (Asset Finance) John Dennis, Australian Structured Finance Peter Siokos, BOQ Equipment Finance Sylvia Terry, CBA (Asset Finance) Jason McGarry, Cisco Systems Capital James Dwyer, Komatsu Corporate Finance Andrew Sidery, Macquarie Leasing Chris Fileman, National Australia Bank Graham Attard, Westpac Bank AFIA Fleet Leasing & Rental Division Council Members

2018–19: Spiro Haralambopoulos (Chair), Leaseplan Ron Santiago (Deputy Chair), Europcar Aust & NZ Ed Stanistreet, Toyota Finance Australia (Fleet Management) Eoin MacNeill, Hertz Aust & NZ Aaron Baxter, Custom Fleet

120-129:WLY 27/11/2019 09:08 Page 121

ducted at the end of 1990 by the advocate for the Australianequipment leasing, the Australian Equipment Lessors Association(AELA),2 found that operating leases represented around 10% ofmember respondents’ leases, particularly for motor vehicles, com-puters and office machinery.

The latest statistical report produced by the Association(rebranded and integrated into the Australian Finance IndustryAssociation (AFIA) in 2017) shows operating leases (excludingmotor fleet leases) accounting for around 34% of the total leasingmarket financed by members.

Going forwards this growth may be impacted by the January1, 2019 introduction of the new lease accounting standard (IFRS16/ AASB 16) requiring operating leases, like finance leases, to bereported on the balance sheet.

How the market functions. Leasing is generally offered aspart of a range of equipment finance products. This allows its’ par-ticular merits vis-à-vis other finance techniques to be weighed andtailored to the customer’s particular needs, taxation and financialposition.

Distribution channels include: direct sales by financiers withwhom the applicant has an existing relationship or via point ofsale providers linked to the financier or others independentlyoperating in the market. Sophisticated transaction packagers andlease brokers also play their respective roles in promoting theproduct.

In terms of general market functioning, leases are written formost capital equipment items (provided they are used for com-mercial purposes) and generally for periods ranging between twoand five years. Implicit rates are competitive and are usually fixedfor the period of the lease.

Provided that the commercial use test is met and no contrarylaw applies (e.g. for vehicles that exceed the luxury vehicle limitthreshold), lessees claim the full amount of the lease rentals as atax deduction; the lessor, as owner, claims the depreciation andusually any investment incentives.

There can be no option during the lease contract to pur-chase the leased goods at the end of the term. The lessee mayhowever re-lease the goods at the end or make an offer to acquirethem.

Law and regulationThe lease product is shaped by taxation and other laws at thenational and state levels reflecting Australia’s complex federal legal

system, general legal principles(including contractual requirements)and accounting standards. Changes inall these aspects (especially taxation)have had, and will continue to have,an impact on the utilisation of leas-ing.

Commonwealth taxation. Taxlaws recognise leasing as one of thefew tax benefit transfer mechanismswithin the Australian taxationsystem. The business lessee is able toclaim a tax deduction for the full

amount of the lease rentals; this contrasts with other forms ofcommercial equipment finance (e.g. hire-purchase, chattel mort-gage) where deductions for depreciation and interest charges areclaimable.

The lessor, as owner, is able to claim the depreciation for thegoods leased as an offset against rental income received. The bal-ance between leasing and other financing methods (from theclient’s point of view) therefore lies in the respective cash repay-ment streams and the relative write-off period betweeninterest/depreciation on the one hand and lease rentals on theother, as reflected in the client’s before and after-tax cashflows.

Up until 2000, Australia’s national income taxation systemhad been relatively neutral between the various equipmentfinancing options (lease, hire purchase and chattel mortgage), witheach alternate product able to compete on the basis of its appro-priateness and flexibility for the particular investment and clientneed.

However, from July 2000 the national consumption tax(GST) treated the financing options differently; chattel mortgageas a financial supply is input-taxed, leasing is fully taxable and hirepurchase could have been a mixture though from July 2012 hirepurchase became taxable. This has impacted customer selectionwith the lease segment decreasing in the equipment financeaggregate.

By far the major statute affecting leasing therefore is theCommonwealth (national) Income Tax Assessment Act (ITAAct).In summary the Act provides for the business lessee to claim taxdeductions for the full amount of the lease rentals; this contrastswith other forms of commercial equipment finance (e.g. hire-purchase, chattel mortgage) wherein deductions for depreciationand interest charges are claimable.

The Act generally provides for the lessor, as owner, to claimthe depreciation for the goods leased as an offset against rentalincome received.

The balance between leasing and other financing methods(from the client’s point of view) therefore lies in the respectivecash repayment streams and the relative write-off period betweeninterest/depreciation on the one hand and lease rentals on theother, as reflected in the client’s before and after-tax cashflows.

Because of its importance in the functioning of the econ-omy, the Australian taxation framework has been regularlyreviewed. An important role of bodies like AFIA is to provideinformed advice to Government on the consequences of their

122

A U S T R A L I A

Table 2: Progressive changes to the company taxrate3

Tax rate for base rateAggregated turnover entities under Tax rate for all

Income year threshold the threshold other companies

2017–18 A$25m 27.5% 30.0%2018–19 to 2019–20 A$50m 27.5% 30.0%2020–21 A$50m 26.0% 30.0%2021–22 A$50m 25.0% 30.0%

120-129:WLY 27/11/2019 09:08 Page 122

proposals and to assist members in their statutory interpretationand compliance.

Leasing tax guidelines. While many sections of the tax lawdeals with how leasing works in the context of the specific sec-tion, no overarching section covers leasing itself. The Income TaxAssessment Act therefore gives discretionary powers to the TaxCommissioner to oversee leasing practices.

The broad thrust of this oversight has been to ensure thatleases were not disguised purchase or conditional sale arrange-ments. Should they have been they would take on the nature of acapital transaction for the lessee. It is noted in passing that hire-purchase contracts, because within the contract, title passes withthe last payment, have been ruled (IT 196) by the Tax Office tobe capital in nature (i.e. the hirer claims depreciation and interestrather than the amount of the repayments).

It is for this reason that for tax purposes, leases in Australiacannot include an option to purchase. In 1998 a court decision inthe Bellinz case cast doubt on the tax treatment of hire-purchasetransactions (compared to leases) but the facts of the case and sub-sequent statute changes settled in favour of the status quo.

Over the years, Tax Office guidelines on leasing have devel-oped along with the product and they find focus in a number ofrulings and are implicit in the operation of the lease market. Careshould be taken however in their interpretation as often theguidelines have changed without particular parts of the rulingsbeing updated. More specific detail on the current framework isavailable from AFIA.

Tax rates, depreciation, incentives and disincentives. Thebasic tax treatment of leasing has not significantly changed.

What has changed however are the underlying rates of tax,depreciation and investment (dis)incentives; these have in turn

affected the relative balance in the two (lessee/non-lessee) write-off time-frames.

Government policy over recent years has seen the significantdecrease in company tax rates; most recently these have supportedsmall businesses (with the rate dropped to 27.5% from FY2017).The entity captured as a small business also shifted with the gov-ernment policy encompassing entities initially with an annualturnover of up to A$10m.

From FY2019, the lower company tax rate applies to baserate entities with an aggregated turnover less than A$50m fromthe 2018–19 income year. The rate will then reduce to 25% bythe 2021–22 income year.

The recent history of capital allowances (investment incen-tives and depreciation) has seen the current government providesimplified depreciation rules for small business taxpayers origi-nally able to claim a A$20,000 instant asset write-off. The govern-ment earlier this year (2019) announced that from January 29,2019 the small business (turnover up to A$10m) instant assetdeduction limit was to be increased from A$20,000 to A$25,000and availability extended until June 30, 2020.

This was changed further in the government’s 2019 Budgetproviding that from 7:30 PM (AEDT) on April 2, 2019 (Budgetnight) until June 30, 2020 the small business (turnover up toA$10m) write-off limit was increased from A$25,000 toA$30,000, applied on a per asset basis.

Medium-sized businesses (turnover from A$10m to A$50m)were also given access to the instant asset write-off in respect ofassets acquired from Budget night to June 30, 2020. The deductionis used for each asset that costs less than A$30,000, whether new orsecond-hand. The business claims the deduction through its taxreturn, in the year the asset was first used or installed ready for use.4

123

A U S T R A L I A

Table 3: New lending volume by product

Note: Totals may not add up due to rounding

Finance leaseA$4.8bn

Operating leaseA$2.4bn

CHPA$1.8bn

Chattel/loanA$31.3bn

2017–18Total: A$40.3bn

Finance leaseA$5.2bn

Operating leaseA$2.7bn

CHPA$1.6bn

Chattel/loanA$30.9bn

2018–19Total: A$40.4bn

120-129:WLY 27/11/2019 09:08 Page 123

Tax disincentives have also impacted the equipment leaseproduct. In 1979 a Motor Vehicle Depreciation Limit was intro-duced to deter “luxury” motor vehicle purchases by limiting theamount of depreciation that could be claimed. Initially set atA$18,000 the Limit has been indexed in line with the motor

component of the Consumer Price Index to now (as from FY19)stand at A$67,525 (A$75,526 for fuel-efficient vehicles).

By limiting the depreciation claimed by the lessor, the disin-centive worked to increase the rental paid by the lessee. As thisonly worked where the lessor was in a taxable position to claim

124

A U S T R A L I A

AFIA Full Members 2018–19

AFIA Associate Members 2018–19

255 FinanceAfterpay Touch GroupAllied CreditAlpha Car FinanceAmerican ExpressANZ Attvest Finance Australian Structured FinanceAutomotive Financial ServicesAvis Budget GroupBank of ChinaBank of QueenslandBayswater Car RentalBendigo & Adelaide BankBeyond Merchant Capital BMW Financial Services Aus.Branded Financial ServicesBrighteCapifyCaterpillar Financial Aus.Cisco Systems Capital Classic Funding GroupCNH Industrial Capital Commonwealth Bank of AustraliaCredit Corp GroupCSGCustom FleetDe Lage Landen / RABODell Financial ServicesDouble M ManagementEast Coast Car RentalsEclipx Group / FleetPartnersElantis Europcar Aus. & NZFinance One

FleetcareFlexFleetFlexiGroup Aus.Funda Finance PartnersGet CapitalGM FinancialGroup and General FinanceHertz Aus.HPE Financial ServicesHunter Premium FundingIBM Global FinancingIndigenous Business AustraliaInvoice MoneyIQumulateJohn Deere FinancialKomatsu Corporate FinanceKubota Australia FinanceLatitude Financial ServicesLeasePlan AustraliaLeasewise AustraliaLiberty FinancialLumiMacquarie LeasingMax Recovery AustraliaMaxiron CapitalMcMillian Shakespeare GroupME BankMercedes-Benz Financial Services Aus.MetroFinanceModus Financial ServicesMoneytechMoula MoneyNational Australia BankNissan Financial ServicesOnDeck

ORIX Aus.PACCAR FinancialPepper MoneyPremium Funding LimitedPrincipal FinanceProspaQFleetQPR Premium FundingQudos BankRAC FinanceRACV FinanceRedspot / EnterpriseScottish Pacific Business FinanceSelfco Leasingsg Fleet / nlcSmart GroupSpotcapSummit FleetTaurus FinanceThorn GroupThrifty Aus. & NZTL RentalsToyota Finance Aus.Volkswagen Financial ServicesVolvo FinanceWalker StoresWells Fargo InternationalWestlawnWestpac GroupWEX AustraliaWingate Consumer FinanceYamaha FinanceZip Co

Amembal & Halladay

Apak Group

Ashurst Aus.

CAFG Australease

Cashflow Funding NZ

Central Finance Management Group

Clayton Utz

Cloud Lending Solutions

Commercial & Asset Finance Brokers

Association

Cornwalls

Credit Sense Australia

Deloitte Australia

Dentons

Equifax

Equiniti Riskfactor

Experian Asia Pacific

FIS Global

Hall Chadwick

Herbert Smith Freehills

HPD Software Asia Pacific

Illion

Inchcape

Insyston

IDS

King & Wood Mallesons

KPMG

Lock Finance NZ

Lowe Lippmann Chartered Accountants

Macpherson + Kelley Lawyers

National Finance Choice

nCino

Netsol Technologies

Norton Rose Fulbright Aus.

Pacific Invoice Finance NZ

Pickles

Piper Alderman

Red Planet Software

Scottish Pacific Debtor Finance NZ

Slattery Asset Advisory

Sofico Services Aus.

Soft4 Leasing

Traction Group

White Clarke Group

Xeberg

120-129:WLY 27/11/2019 09:08 Page 124

depreciation within the Australian tax system, the law waschanged in 1996 to simply have such transactions for “luxury”vehicles taxed as if they were loans.

More recently, state governments have introduced furtherstate-taxes applied to luxury vehicle purchases (e.g. Queenslandand Victoria).

Since 2005, another major distortion has arisen caused by theTax Commissioner’s reassessment of the effective life of commer-cial vehicles from 6.67 years to 12 years for light commercialvehicles and to 15 years for trucks.

As it is the Commissioner’s assessment which underpins theIT 28 schedule of safe harbour residual values (essentially 75% ofeffective life prime cost written down value), overnight suchresidual values increased considerably. Second-hand vehicle valuesdid not of course similarly move, with the result that it wasuneconomic and imprudent to write leases for these items.

This despite the government enacting statutory caps toremedy the re-assessment and increasing the diminishingvalue/prime cost depreciation loading from 150% to 200% toensure that depreciation deductions more closely reflect the asset’sdecline in actual value.

As can be seen from the foregoing truncated history ofdepreciation and other capital allowances, these can and dochange frequently in line with the government of the day’s policyintentions for capital investment.

The changes affect the underlying economics of asset acqui-sition/utilisation, and then how they operate, or are perceived tooperate, between the different financing alternatives. Because leas-ing is effectively after-tax (i.e. lease pricing models incorporateany tax changes into the amount of the lease rental), such policychanges have an immediate and obvious result.

Other financing alternatives, such as hire purchase or chattelmortgage, can seem to remain unchanged because the after-taximpact is in the customer’s books at a later time when the taxreturn is completed.

Cross-border, leveraged leasing and leasing to governmentand other tax preferred entities. The packaging and promotion ofincreasingly sophisticated leasing transactions, especially in theleveraged lease area, has prompted our national government topreserve its revenue base by restricting some tax measures’ appli-cation to leasing.

The financing “arrangements” to which these restrictions(ITAA Part III Division 16D) applied include those which metany of the following tests:1. (a) where the end-user (or associate) indemnifies the owner

for the guaranteed residual value;(b) where at the end of the arrangement all or part of the

property is transferred to the end-user (or associate);(c) where the end-user (or associate) has the right to pur-

chase or require transfer of all or part of the property;(d) where the arrangement period exceeds one year and the

end-user (or associate) is liable for repairs to all or partof the property.

2. where the arrangement period is greater than or equal to50% of the effective life of the property (for eligible realproperty) or 75% of the effective life of the property (for eli-gible property other than real property);

3. where the amounts of arrangement payments are greaterthan 90% of the lesser of the property’s cost price or depre-ciated value at the commencement of the arrangement.These tests aim at identifying economic ownership. With a range of privatisations involving assets of previously

125

A U S T R A L I A

Table 4: New lending by equipment type

Note: Totals may not add up due to rounding

Cars, light commercials39.3%

Trucks, trailers, buses18.2%

Aircraft1.2%

Other transport equipment

1.6%

Agriculturalequipment

6.7%

EDP,office machines

3.6%

Manufacturingequipment

3.6%

Mining,earth, cons.

12.6%

Other13.2%

2017–18Total: A$40.3bn

Cars, light commercials36.4%

Trucks, trailers, buses18.2%

Aircraft1.5%

Other transport equipment

1.7%

Agriculturalequipment

6.3%

EDP,office machines

4.7%

Manufacturingequipment

4.1%

Mining,earth, cons.

14.1%

Other12.9%

2018–19Total: A$40.4bn

120-129:WLY 27/11/2019 09:08 Page 125

tax-exempt entities entering the pri-vate sector, from August 1997 anumber of technical amendmentsapplied to limit the depreciationdeductions that can be claimed bypurchasers of such entities, to thehigher of the asset’s notional writtendown value or its undeducted pre-existing audited book value.

The tax benefit transfer issue.Leasing captures and crystallises taxa-tion deductions and incentives avail-able within the system and withingovernment policy, focusing theireffect on the area where it will havethe most impact: reduced cash flowto the lessee.

A business just starting out, orone in the process of restructuring, isunlikely to be generating currentyear taxable income. In these circum-stances tax deductions for deprecia-tion or investment incentives do notachieve their desired policy effect –rather they simply add to carry-for-ward losses.

Through leasing, the lessor canclaim these deductions against itstaxable income, crystallise the benefitand pass on that benefit to the lesseein the form of the tangible incentiveof reduced cash repayments.

Unfortunately, the aggregation of such deductions in thebooks of a relatively few lessors can be misunderstood and canresult in the contemplation of restrictions. Such a view, by focus-ing on only one side of the transaction, can ignore the essentialsymmetry of taxation systems (i.e. if through a tax benefit transferthe lessor’s taxable income is reduced, such reduction in a com-petitive market flows on to lower rentals to the lessee which inturn represent a reduced tax deduction).

With this tax benefit transfer ability, leasing is an essentialfinancing tool for a dynamic and competitive economy. If fromtime-to-time a new application or financial product developmenttests the legislative or taxation framework, this should be seen as ahealthy and necessary sign of an innovative financial system.

As can be seen from this, a major role of AELA (and nowAFIA) is to put the case for ensuring that particular legislativeresponses do not unduly impair leasing’s tax benefit transfercapacity, to the detriment of the economy’s production, invest-ment and employment. That said, the macroeconomic (low infla-

tion and interest rates) and fiscal (low tax rates and capitalallowances) conditions of the past two decades, has meant thatthere are only minimal tax benefits inherent in the system totransfer and price into the rental.

Goods and Services Tax (GST). Up until June 30, 2000, asystem of Wholesale Sales Taxes on particular items of equipmentoperated with a range of tax rates and exemptions. From July 1,2000, a uniform 10% Goods and Services Tax (GST) has applied.

From a financier perspective, a key element of the GSTregime is the fact that “financial supplies” (e.g. chattel mortgages)are exempt, which means that the lender is input-taxed (i.e. isunable to claim back the GST components of its input costs)resulting in the commercial customer paying unspecified higherinterest or fees which cannot be claimed back.

Leases on the other hand are “taxable supplies” which meanthat business lessees claim the GST component of their rentals asa reduction of their GST liability. Hire purchase contracts couldhave been a mix of taxable and financial supplies, depending onwhether or not the interest element is documented. However, this

126

A U S T R A L I A

Excluding fleet leasing, equipment finance inAustralia represented A$40.4bn in FY2019.

120-129:WLY 27/11/2019 09:08 Page 126

was clarified in July 2012 when hire purchase became taxable asexplained further below.

A range of other nuances, especially in the transitional periodwhen many existing leases were to attract GST, but loans and hirepurchases would not, saw a switch away from leases.

With the transitional impacts behind it, the market has nowto deal with the remaining perceived and actual GST conse-quences for equipment financing. In relation to leasing, the chal-lenge is to explain to clients that they recoup the GST on theirnext monthly or quarterly return and that competing productsinvolve a higher price due to input-taxation.

In relation to the non-lease finance products, (then) AELAfor several years lobbied the government to remove the GST dis-tortion, which was moving “cash basis taxpayer” clients from hirepurchase into chattel mortgage, because the former are requiredto claim back the GST over the life of the contract whereas thelatter claim it up front.

We were therefore pleased that in the 2010 Budget, the gov-ernment announced the removal of this distortion effective July1, 2012; AELA also supported the decision to make hire purchasefully “taxable” from the same date therefore removing the previ-ous tension between the percentage of input tax credits claimedby financiers and that asserted by the Taxation Office.

State and territories taxation. The second aspect of the leg-islative context of leasing in Australia relates to state-based stampduties. These are forms of taxation at the state and territory gov-ernment level. as a result of lobbying the state governments effec-tively abolished these duties on the various equipment financeproducts; initially removing the distortion between leasing andother forms of equipment finance and then abolishing the dutiesacross all the products.

To conclude on taxation, there has been a major change inboth Commonwealth and State Tax philosophy towards self-assessment backed-up by field audit. This has meant that equip-ment financiers need to ensure the regular maintenance andverification of their procedures and pricing to ensure compliance.

Other regulation. In relation to other regulation, specificstatute coverage of lease finance is limited to “consumer” leases(that are not otherwise exempt) or “consumer” deemed credit saleagreements where the consumer use of the goods is the dominantpurpose arising from National Consumer Credit Protection Act(NCCPAct).

Other than the NCCPAct, the legal impact on a lease con-tract arises from the common law or general legal principles (cor-respondence with description, quiet enjoyment, fitness forpurpose) and from the Australian Consumer & Competition Act(CCAct) Australian Consumer Law (ACL) provisions, in particu-lar (currently for goods under A$40,000 and truck owner/drivers– “consumer” guarantees apply and some liabilities where thelessor is “linked” to the supplier. We note reform proposals thatwould see the monetary threshold increase to A$100,000).

Also relevant are the Australian Securities & InvestmentCommission (ASIC) Act provisions prohibiting conduct in theprovision of financial products which is unconscionable, mislead-ing or deceptive.

Generally speaking “consumer” reforms in Australia have

been introduced so as to avoid the more commercial areas such asleasing, thereby allowing flexibility in contractual arrangementswithin the Common Law and Trade Practices framework of pro-tections.

However, as a complex of State and Federal laws operatewith varying tests and exemptions it would be advisable to care-fully explore the legal requirements for contracts before contem-plating any involvement in the Australian market.

In addition, as with other areas of the law, the impact ofjudgments in cases coming before the Courts in relation to con-tract terms and practices needs to be closely monitored. In partic-ular, cases that have placed restrictions on the amountsrecoverable from lessees by lessors where the lessees default intheir rental repayments and the lessors are forced to repossess theleased goods. The doctrine of penalties, as recently extended inthe 2012 Andrews vs ANZ High Court decision, is a key elementof what is recoverable.

Over the years there has been occasional consideration ofextending consumer type disclosure and other protection require-ments to small business and farmer lessees and borrowers. This hasbeen strongly resisted by AELA (now AFIA) as counterproductiveto the better interest of these “new consumers,” not because ofthe requirements themselves, but because of the operationalrigidities that they can imply impeding access or increasing thecost of small business finance.

The issue again arose during 2011/12 with the then govern-ment considering inclusion of “small” businesses in theNCCPAct. Fortunately, this was rejected, particularly on theresponse from the SME that it wanted improved access to finance,not additional red tape.

From July 1998 “commercial unconscionability” provisionswere included in the CCAct. The operation of these provisionscontinues to be monitored, however to-date no instances of con-cern have arisen in relation to leasing and equipment finance. Inthe related area of ‘unfair contract terms’, in 2007 theProductivity Commission recommended that the Governmentintroduce such a regime for consumer transactions.

When the draft legislation was introduced, however, itincluded “business-to-business” (B2B) transactions in its ambit. Asthis would have increased the risk in lending to such businesses,AELA lobbied that the law be confined to true “consumers” andwhile we were pleased that this was the outcome, it was regret-tably short-lived, with the new government as part of its SmallBusiness programme legislating a B2B regime for standard formcontracts which came into effect mid-November 2016.

AELA, in conjunction with ASIC, the corporate and finan-cial sector regulator, ran a detailed workshop on this change andthe necessary process and review steps.

A major part of the AELA (now AFIA) lobbying frameworkdeals with lender liability issues. These can include environmentalpenalties and remediation statute impacts, security interests andforfeiture, OH&S and product defect liability.

Over recent years environmental laws when introduced haveincluded “passive financier” provisions which have assisted mem-bers. This issue was to the fore in 2001 in relation to theCommonwealth Damage by Aircraft Act, which placed strict and

127

A U S T R A L I A

120-129:WLY 27/11/2019 09:08 Page 127

128

A U S T R A L I A

unlimited liability on the “owners” of aircraft, as well as operators.This created considerable concern post-11 September wheninsurance became unavailable.

AELA made several representations on this and the govern-ment amended the law to provide passive financier relief. Progresshas also been made on ensuring greater consideration for finan-ciers’ interests when secured equipment is involved in some crim-inal or civil breach. Personal property securities law and recentreform proposals have also been a key area of focus for AELA(now AFIA) (see section on ‘securities issues’).

Away from “black letter” law there has been an increasingreference of complaints by small business to External DisputeResolution Schemes (EDRS) which might impact on equipmentfinance.

These began some 20 years ago as voluntary self-regulatorycodes for bank consumer customers and separately for those ofmortgage brokers. Subsequently the banks extended their Codeto cover “small business” customers. Any commercial uncertaintythat this extension created was then limited to the banks and theirvoluntary code.

However, with the commencement of the NCCP Act mem-bership of an EDRS for consumer credit lenders became compul-sory and care needed to be taken to assess the uncertainty aroundcommercial business written out of consumer credit financiers.

This has been enhanced by two developments, the revisionof the Banking Code of Practice (expanding its scope of smallbusiness coverage) and the move to a single-EDRS for our sector,the Australian Financial Complaints Authority.

More recently, an Australian Small Business & FamilyEnterprise Ombudsman (ASBFEO) has been established by thegovernment with wide-ranging powers. She has utilised these toeffectively advocate on behalf of her small business constituentsincluding in relation to unfair contract terms protections.

The other significant area of regulatory focus in FY2019with the potential to impact on our equipment finance market isthe Royal Commission into Banking and Financial Services. Thishas seen the release of a Final Report and the government’sresponse and an implementation roadmap. AFIA’s response to rec-ommendations impacting equipment finance is focused on main-taining the customer benefits (particularly for small businesscustomers) from the leasing and the other equipment financeproducts.

Accounting for leases. A fourth aspect of the regulatoryframework derives from Accounting Standards and practices.

The IASB’s IFRS 16 Leases was released in January 2016 andwas subsequently ratified by the Australian Accounting StandardsBoard (as AASB 16) to apply to annual reporting periods begin-ning on or after January 1, 2019. While there is convergence withthe US FASB equivalent, there are variations.

Securities issues. Across the range of equipment financeproducts, from rentals to chattel mortgages, financiers have differ-ent security interests, registration requirements and realisationoptions.

For leases and hire-purchase contracts, the lessor/financier isthe equipment owner and in a range of default situations can takepossession of the item and sell it. Under the lease, the lessor is typ-

FY2019 continued to see growth in the Australian equipment finance market with the non-lease segment making up the significant portion and the lease segmentdiminishing in aggregate for another year.

120-129:WLY 27/11/2019 09:08 Page 128

ically entitled to the full amount of the rentals outstanding less adiscount for receiving those rentals earlier than contracted.

By comparison, enforcement of the hire-purchase agreementwill involve a rebate of the interest/terms charges.

Under either scenario, the calculations must not be able tobe characterised as a “penalty” at law. A further difference is thatthe hirer must receive the benefit of any surplus after sale of theasset and settlement of the account; the lessee on the other hand,may not receive such benefit – under current low inflation, sur-pluses are however rare.

For chattel mortgages, at general law, the respective parties’rights will be determined by the terms of the contract. Generally,those terms will allow the mortgagee (financier) to take posses-sion of the secured asset, sell it and proceed against the mortgagor(borrower) for amounts that remain outstanding under the con-tract, including any personal covenants or guarantees.

For many years, we have worked with all governments toharmonise the operation of the various registers of security inter-ests, particularly for motor vehicles. This process came to fruitionon January 30, 2012 with the commencement of a national regis-ter (the Personal Property Securities Register (PPSR)) of all secu-rity interests in all non-real property assets.

Marred by initial data migration issues, the new regime isslowly bedding down and providing major operational benefits.Areas of concern remain, particularly in the context of sub-leas-ing and AELA took these up in the Post-Implementation(Whittaker) Review and is presently through AFIA promotingindustry recommendations to the government. We anticipate draftlegislation to be released for consultation in FY2020.

The principle of “seize or sue”, which requires the financierto make an election between being satisfied through the taking ofpossession or leaving the asset with the defaulting customer andsuing for the full amount, is not part of Australian debt recoveryjurisprudence. This enables much better credit risk assessment, tothe benefit of equipment finance availability and pricing.

Data and open banking. The government is committed toenhancing competition through the development and implemen-tation of ‘Open Banking’. Major banks will be obliged to providecustomers (including business customers) access to data held toenable other providers to better assess credit risk to the benefit ofequipment finance availability and pricing.

This also coincides with the outcome of its MandatoryComprehensive Credit Reporting policy which also obliges themajor banks to disclose data in the consumer credit reportingsystem accessible by providers including commercial providers(noting the limitation in access to repayment history informationfor commercial providers).

Lease industry representation. In Australia, finance compa-nies pioneered leasing in the 1950s and today continue to writea significant volume of new leasing. With lease finance account-ing for over 30% of financiers’ lending operations, what wasthen their national industry association, the Australian FinanceConference (AFC) had for many years fulfilled the role of lessorindustry association in terms of legislative and tax representa-tions.

In the latter part of 1986, a series of meetings of lease market

participants led to the establishment of the Australian EquipmentLessors Association (AELA).

More recently following a 2016 Strategic Review, AFCmembers voted to change the name of the organisation to theAustralian Finance Industry Association (AFIA) and the membersof the various affiliated associations, including AELA, voted tobecome divisions of AFIA so as to more effectively harness theirnumbers and role in the economy, to better advocate for industryissues and concerns. Further detail, including a list of AFIA mem-bers, is available through: www.afia.asn.au.

Leasing outlookLeasing in all its forms has for several decades proved to be anequipment financing technique suitable to all stages of the eco-nomic cycle. We expect leasing will continue to be a key productin supporting and developing the Australian economy’s produc-tive base into the future.

Economic conditions and government policy reform at boththe national and state levels will continue to impact. AFIA, as thevoice of a diverse Australian finance sector strengthened by morethan 100 organisations from both the mature and developing endsof the financial services market, is well-placed to influence andensure leasing remains a viable product offered by AFIA membersfinancing Australia’s future.

For further details on the Australian leasing market visit theAFIA website www.afia.asn.au (Equipment Finance Division).The AFIA Equipment Finance Division meets several times eachyear: March, July, October and at a general event combined withmembers from all divisions in late October/early November.Industry members from overseas are welcome to attend, by priorarrangement with AFIA. The Annual AFIA Conference is held inNovember each year.

Notes:1 AELA has since transitioned to become the Equipment Finance Division

of the Australian Finance Industry Association (AFIA).2 AELA has since transitioned to become the Equipment Finance Division

of the Australian Finance Industry Association (AFIA).3 Extracted from the ATO website: https://www.ato.gov.au/

Rates/Changes-to-company-tax-rates/#Baserateentitycompanytaxrate.4 Extracted from the ATO website: https://www.ato.gov.au/business/small-

business-entity-concessions/what-s-new-for-small-business/.

129

A U S T R A L I A

Author:Helen Gordon

Chief Executive OfficerAustralian Finance Industry

AssociationLevel 11 130 Pitt Street

Sydney 2000Australia

Tel: +61 (0)2 9231 5877Email:

helen@afia.asn.auWebsite:

www.afia.asn.au

120-129:WLY 27/11/2019 09:08 Page 129