For new business in 2016, within the general equipment finance sector, leasing accounted for 18% of the total portfolio, and a third of leasing is operating leases, with finance leases the remainder. Hire purchase was 5%, and chattel mortgage was 77%. These aggregates are illustrated in table 2 below, which also separately shows the general equipment finance business and the fleet leasing industry.
Not surprisingly, leasing makes up 92% of the fleet leasing business; operating leases predominate, but the finance leasing component is boosted because of novated leases, some of which are operating leases but most are finance leases.
The trends in this broad mix are not only affected by economic conditions but also by Government policy, with the latter particularly evident in the last decade. The introduction of GST produced a significant shift away from finance leases and initially to hire purchase, as the transitional GST arrangements did not apply to hire purchase. This trend was followed by a move from hire purchase to chattel mortgage and leasing, caused by an inappropriate GST outcome in relation to hire purchase contracts entered into by cash basis taxpayers. Also, as from 1 January 2005, the Commissioner of Taxation’s revised effective life determinations for trucks and like assets translated into unrealistically high ‘safe harbour’ residual values in leases for these assets, resulting in a shift away from leasing to the provision of hire purchase and chattel mortgage products for these transactions.
The tax issues are the subject of AELA’s ongoing consultations with Treasury and the Tax Office, and were raised in AELA’s submissions to the Board of Taxation GST Review, the Henry AFTS Review and in response to the 2014 Tax Discussion Paper. The GST anomaly in relation to hire purchase cash basis taxpayers was rectified as from 1 July 2012. As from that date, hire purchase is fully taxable and accordingly will not be suitable for all equipment finance and has declined as a proportion of overall equipment finance. Besides GST and income tax, differences between the States in the scope and rate of stamp duty have caused distortions in the product mix. However all jurisdictions have now abolished these duties, and accordingly it is pleasing to report that stamp duty distortions no longer apply in the equipment finance market.
The graphs above illustrate the product breakdown within the equipment finance portfolio. With the inclusion of the fleet leasing industry, overall leasing increases from 18% to 27% of new business, hire purchase is 6%, and chattel mortgage declines from 77% to 68%. The impact of regulatory influences on the composition of equipment finance business has been quite dramatic. Since 2000 total lease business has declined from 60% to 27%, hire purchase has declined from 40% to 6%, and from very little chattel mortgage business now makes up 68% of the total. These movements underline the significance of the stamp duties and GST changes in removing distortions created by regulatory arrangements.