Hand up, yes, we’re fessing up that we have been one of the many equipment finance lenders that have been continually promoting IAWO and temporary full expensing to our customers over the past year or so. For good reasons. These accelerated asset depreciation measures represent significant tax breaks for businesses. They allow for the full value/purchase price of depreciable assets to be realised as a tax deduction by eligible businesses, in the same year that the assets were acquired.
This is significantly better than under normal depreciation tax rulings where only a percentage of the value of these assets can be claimed as a tax deduction each year. So it can take many years to fully realise or ‘write-off’ the purchase price against tax. The benefits to business are by having a larger amount to deduct in one year, the taxable income is reduced, thus reducing the tax obligation. When used in conjunction with loss carryback, temporary full expensing presents a supercharged tax benefit.
The success of these measures as introduced in the Federal Budget has been widely accepted across industries. Reportedly, sales of equipment, especially trucks and vehicles, have spiked and the reason in many cases is being given as the benefits from these measures.
But in order for equipment to be eligible for these measures, for the business to realise the tax benefit, the equipment must be acquired with the appropriate finance product. That is considered to be Equipment Chattel Mortgage as the ownership of the asset is taken by the borrower and the equipment listed on their balance sheet and hence can be depreciated in line with current ATO rulings.
All well and good for those businesses. But what if a business does not consider Chattel Mortgage to present the overall best finance package to suit their financial objectives? What if a business does not really want the entire value of the equipment being acquired listed as an asset/liability on their balance sheet? Such a move can have drawbacks, especially if applying for other loans.
Fortunately, there is a range of equipment finance products available to all types of businesses, for all types of equipment purchases and they all have tax-deductible elements in the loan. We provide a brief summary of the range of equipment finance products with aspects that require consideration when selecting which finance product will work most effectively for your business.
Equipment Finance Products
Jade Equipment Finance provides a complete portfolio of finance facilities for purchasing equipment:
Regardless of which product is selected, some aspects are universal across our equipment loans including:
- Cheap, fixed interest rates.
- Finance terms are fixed and negotiated to best meet preferences.
- Monthly repayments are fixed and negotiated to an amount that best works with the business cash flow.
- A residual or balloon is allowed.
- No deposit equipment finance is available.
- Equipment Low doc and no doc loans are available.
- Bad credit finance solutions are possible.
Tax Deductible Equipment Finance Elements
All business finance has a tax-deductible element but that is realised differently. As mentioned above, with Chattel Mortgage, the major tax deduction is realised through depreciation as the repayments are not fully tax-deductible. Only the interest on repayments is deductible.
But Leasing and Rent to Own also include significant tax deductions. As the repayments are considered as an operating expense, the entire amount is tax-deductible. So if you multiply the monthly repayment by 12, you’ll see how much the tax deduction would be each year over the term of the finance.
With the ‘other tax’, GST, is also treated differently. GST is not charged on the interest on any type of loan.
With Chattel Mortgage the full amount of GST which is included in the purchase of the equipment can be immediately claimed on the next BAS return.
With Leasing and Rent to Own, GST is charged on the monthly repayments ex the interest portion. For businesses registered for GST, the monthly GST can be claimed on the relevant BAS, whether that be monthly, quarterly or annually. Over the term of the finance, the entire GST would be claimed, it just takes longer than with Chattel Mortgage. More info.
Equipment Loan Ownership Issues
We eluded to balance sheet entries above and should elaborate. With Chattel Mortgage the equipment appears on the business balance sheet. With Leasing and Rent to Own, the lender retains ownership of the equipment over the finance term. The asset does not get listed on the borrower’s balance sheet. These are known as off-balance sheet finance products and considered to improve the balance sheet.
This strategic approach to the balance sheet can present benefits to a business. Your accountant or tax agent will be best placed to discuss those issue in relation to your specific situation.
Sourcing Tax Effective Equipment Finance
All business equipment finance has tax-deductible elements but the overall package, all the individual features of each product should be taken into consideration. Jade Equipment Finance sources the most cost-effective finance which meets the specific requirements of our customers. With no obligation attached, our consultants can source you finance quotes on different loan options for you to consider which presents the best option to support your business.
Contact 1300 000 003 for quotes on all types of equipment finance.
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR