Extended Rental Agreement

Waimarino Bulletin, Volume 5, Issue 11, 11 August 1987, Page 4 (Supplement)

Extended Rental Agreement

Continued from page 2 the specified lease and the extended rental agreement. Specified Lease Under the specified lease, the client is responsible for the residual value. It is treated just like a credit contract. Rental payments are split into principal and interest amounts, subject to a finance rate. The lessee accounts for the lease as though the vehicle was purchased and, accordingly, claims tax relief for depreciation and interest payments. With the removal of the

restriction of depreciation on motor vehicles, there is a higher tax claim available in the first year than with the alternative lease option. The downside to this form of lease is that the client has an on-going liability in terms of maintenance and the eventual sale price of the vehicle if it does not meet the residual value. The other form of lease that is available is a newer product which is, in effect, an extended rental agreement where the client has no residual value obligations. The rental lease is clearly an expense and therefore an

off-balance sheet item. The rental amount usually includes maintenance. Since these are pure rental agreements where it is not possible to differentiate between principal reductions and interest, they are classified as rental contracts and accordingly do not show a finance rate. The lessee claims the rental as a tax expense. On maturity, the client returns the vehicle and presumably starts again with a new contract and a new vehicle. The client is not involved in the sale of the vehicle and generally gains little benefit from profit on sale.