Income tax: is a lease acceptable if it is based on a $1 residual value?

No. The residual value of a leased item should either conform with the table of minimum residual values set out in IT 28 or a well considered estimate of the market value of the leased item at the end of the lease.

A $1 residual value would only conform to this test if the market value of the asset was $1, indicating that the term of the lease was the effective life of the asset. A lease for the substantial life of an asset is not accepted as a genuine lease (see IT 2594).