Best way to finance your business assets

Best way to finance your business assets


Are you thinking of acquiring, upgrading or replacing capital assets that will be used in running your business?

Overview

As you are aware, there are different ways to finance assets that will be used in your business (e.g. cars, boats, trucks, buses, aircraft, computers and other machinery and equipment).

The type of finance chosen can affect:

  • when the legal ownership of the asset changes hands (e.g. when does the cient become the owner); and
  • the amount and type of tax concessions available (e.g. who can claim the depreciation or monthly payment as a tax deduction).

It is often difficult to decide which kind of finance to use. To assist you with making this decision, we have provided a brief overview of there of the most common types of asset financing.

Hire Purchase


  • amount financed is the GST inclusive amount of the assets (less trade-ins or deposits)
  • client can claim depreciation and interest charged (but not monthly instalment payments)
  • new GST rules apply (for entities accounting for GST on a cash basis) to hire purchase agreements entered from 1 July 2012 (upfront claim for input tax credits)

What is it?

Under a hire purchase agreement, the financier buys the asset and the client hires the asset from the financier for a fixed monthly repayment over a set period. During this time, the client may use the asset but is not the owner of the asset. The title to the asset only passes once the goods have been paid for.

The financier must finance the GST inclusive amount less trade-ins or deposits.

What happens at the end of the hire purchase?

At the end of the hire purchase agreement, the client becomes the owner of the asset when it makes the final payment. The residual value can be fully amortised (so there is no residual value) or have a residual value to reduce the monthly instalments.

Income tax treatment (Division 240)

The client may claim tax deductions for:

  1. depreciation (up to the depreciation limit for vehicles);
  2. running costs of the asset; and
  3. interest paid on the loan (apportioned for business use).

The client may not claim the monthly instalment payments as a tax deduction.

GST treatment

GST is charged on the purchase price of the asset and on interest and fees payable on settlement of the contract (but not on the residual payment). GST can either be added to the loan or paid up-front.

For hire purchase agreements entered into on or after 1 July 2012, the GST registered client can claim an input tax credit upfront (for the price of the asset) regardless of whether they use the cash or accruals basis of accounting for GST.

Chattel Mortgage


  • amount financed is the GST inclusive amount of the assets (less trade-ins or deposits)
  • client can claim depreciation and interest charged (but not monthly instalment payments)
  • upfront claim of GST input tax credits

What is it?

Under a chattel mortgage agreement, a seller/financier advances funds to the client to purchase the asset. The seller/financier takes out a mortgage over the asset acquired as security for the loan.

Unlike a hire purchase agreement, the client will immediately become the legal owner of the asset.

The seller/financier must finance the GST inclusive amount of the assets (less trade-ins or deposits. Financing is done through a loan.

What happens at the end of the chattel mortgage?

Once the final payment has been made (i.e. the residual value has been fully amortised), the security interest over the asset is removed.

GST Treatment

GST is charged on the purchase price of the asset but not on the monthly rental or the residual payment.

The GST registered client can claim input tax credits upfront for GST paid on acquiring the asset as soon as they lodge their BAS (and not progressively over the term of the loan).

Income Tax treatment

As with a hire purchase, the client may claim depreciation (up to the depreciation limit for vehicles), running costs and interest paid as tax deductible expenses from the start of the chattel mortgage.

Operating Lease


  • amount financed is the GST exclusive amount
  • client can claim whole monthly payment as a tax deduction (except if client leases a car under a salary sacrifice novated agreement or does not use it for business purposes)
  • GST input tax credits claimed in each monthly or quarterly BAS

What is it?

Under an operating lease, the financier/lessor purchases the asset and leases it out to the client.

The client may use the asset for the duration of the agreement in exchange for payment of a fixed monthly lease rental for the term of the lease – but ownership of the asset remains with the financier/lessor.

Unlike hire purchase agreements and chattel mortgages, the amount financed under the lease is the GST exclusive price of the asset – resulting in lower monthly payments for the client.

What happens at the end of the operating lease?

At the end of the lease, the client can either:

  • pay the residual value (final instalment) of the asset and become the owner;
  • trade it in; or
  • refinance the residual and continue the lease

GST treatment

GST is charged on the monthly lease rental and the residual value at the end of the lease.

A GST registered client can claim back GST input tax credits contained in:

  • the monthly lease rental (claim in each monthly or quarterly BAS over the life of lease term); and
  • the residual value

Income tax treatment

Lease payments (less GST input tax credits) are tax deductible if the asset is used for business purposes.

 

 

If you have any further questions regarding Hire purchase, lease or chattel mortgage, or would like to know about acquiring, upgrading or replacing capital asset that will be used in running your business, please contact SMART Business Solutions on 03 5911 7000 or reception@smartbusinesssolutions.com.au.

Want to grow your business & improve cash flow?

You need SMART solutions for YOUR business, not just annual tax compliance! Get the SMART team working with you. Call SMART Business Solutions today on 03 5911 7000.

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