As your business grows, so do the number of decisions you have to make regarding the finance of your motor vehicles, plant and equipment. Your decision to either purchase goods from available cash flow, or finance them, may have both cash-flow and taxation implications for your business. What’s best for your business will depend on your circumstances at the time.
Examples of business equipment that can be financed:
Business equipment financing has changed over the years. The changes have a lot to do with the introduction of GST, which affects the cost-effectiveness of traditional equipment finance for many businesses.
If you’re looking to finance equipment for your business, you should also be aware that some finance products will have characteristics that are more beneficial than others.
The following is a brief summary of these characteristics, and for the purpose of the exercise, a number of assumptions have been made; including that the equipment is used to generate assessable income.
Remember, in all situations, what is best for your business will depend on your circumstances at the time.
With a Finance Lease, you can utilise new equipment for your business, without any capital outlay or ownership obligation. You can obtain 100% financing, with repayments to suit your cash flow.
Leasing involves you identifying the equipment you wish to use in your business and negotiating a commercial purchase price. The equipment is then purchased by the lease provider and leased to you for an agreed term – commonly two to five years.
With the introduction of GST, the bank as owner of the equipment may be able to obtain an input tax credit for the amount of GST included in the original purchase price of the equipment. Therefore, whilst the supplier of the goods will receive full payment for the purchase price, the amount financed is based on the original purchase price net of GST.
The predetermined residual values are based on Australian Tax Office (ATO) effective lives for various equipment and are guaranteed by the business. One of the things that makes leases so attractive is that lease rentals are usually tax deductible, as long as the equipment is used to generate assessable income, whilst the GST component of the rental may also be claimed in the business’s next Business Activity Statement (BAS).
The Asset Purchase (or commercial hire purchase) facility is similar to the Finance Lease facility, in that the finance provider owns the equipment for the term (commonly two-to-five years) of the agreement. However, once the final payment is made, your business immediately assumes ownership of the equipment.
With an Asset Purchase facility, the interest and depreciation components are usually tax deductible, providing the equipment is used to generate assessable income. It should also be noted that the repayments under an Asset Purchase facility can be higher than rentals under a Finance Lease facility over the same term, if there is no final balloon payment built into the finance structure.
If you’d like finance that enables you to have immediate ownership of your equipment, a Chattel Mortgage may be just what you’re looking for.
You can finance up to 100% of the purchase price, and your payments can be structured to suit your cash flow. You’ll have a fixed interest rate, and you can choose whether or not to have a balloon payment at the end of the contract. There’s no GST on your instalments, and depreciation and interest may be tax deductible.
The Equipment Loan facility may be attractive if you use cash accounting in your business. You may be able to claim the GST component of the purchase price of the equipment in your next Business Activity Statement (BAS), after the bank has made payment to the supplier.
As the name suggests, this means of financing the acquisition of equipment involves the provision of security to the lender over nominated chattels (i.e. various plant, equipment and motor vehicle etc.) by way of an Equipment Loan Agreement.
In simple terms, this type of finance is structured in the same manner as a property mortgage, with the equipment owned by the business, but allocated as security against the loan.
As with an Asset Purchase facility, the interest and depreciation components are usually tax deductible, provided that the equipment to be financed is used to generate assessable income. Terms for finance also normally range from two to five years.
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