While the focus for tax can be either at the start of a new financial year or in a last-minute rush towards the end of one, the start of the calendar year can be an ideal time to review options and opportunities. For businesses considering investing in new machinery and plant to upgrade and boost the operation, being across current equipment finance tax deductions can form an important part of the funding process. Realising maximum allowable deductions and benefits can reduce the overall costs and tax payable by the business.
Business tax rulings typically cover a financial year – 1 July to 30 June. Changes to tax rulings are typically made by the Federal Government in the Annual Budget, brought down in May and effective when the Budget Act is passed into law. The intention being for changes to come into effect from 1 July in the specified year. An exception to this was with the introduction of IAWO/temporary full expensing as a COVID business support measure.
This measure ended at the end of the last financial year. But a new measure was announced by the Federal Government in the Budget - 2023/24 Instant Asset Write-Off for small businesses on assets up to $20,000. It appears this has not yet been passed into law with the Bill still before Parliament according to the latest ATO update.
However, deductions are still available on asset acquisitions for all types of businesses under the usual regulations. With experienced brokers across the latest rulings, Jade Equipment Finance assists business to optimise equipment finance tax deductions with customised loans.
Optimising Equipment Finance Tax Benefits – Choice of Credit Facility
There are four main commercial lending products which businesses can use to fund asset purchases – Chattel Mortgage, Lease, Commercial Hire Purchase, Leasing and Rent-to-Own. There are differences in the way that tax – both GST and income, is treated with the credit product. So the choice of loan type is an important consideration to achieving a tax-optimised solution. But the deductible benefits may not necessarily be the key to the choice.
The accounting method used by the business can be a deciding factor. Chattel Mortgage and CHP are compatible with the cash method of accounting and Leasing, Rent-to-Own and CHP compatible with the accruals method. Speak with your accountant as to which loan type is the best match with the accounting method used to prepare your annual accounts.
Treatment of GST with Equipment Finance
How the GST charged on a machinery purchase can be claimed by the business varies with lending products. With CHP and Chattel Mortgage, businesses can claim the full amount of GST charged on the purchase on the next BAS return after purchase. Businesses acquiring new machinery with these forms of credit can benefit with a significant GST deduction on their quarterly or annual return which may ease cash flow. As the entire amount has been claimed, no further GST is claimable on that acquisition.
With Lease and Rent-to-Own the GST is applied to the monthly payments. This can then be claimed on the corresponding BAS returns over the full term of the funding.
GST is not charged on interest payable on any forms of commercial asset acquisition credit.
Of course, GST can only be claimed by entities that are registered for GST. This is not essential to getting approved for a machinery loan, but may be preferred by lenders and may deliver benefits to the entity. Small and new businesses can review how to apply and what is involved at Business.gov.au.
Chattel Mortgage Equipment Finance Tax Deductions
Chattel Mortgage for equipment is one of the most popular forms of machinery funding as it suits the cash accounting method and is a secured form of credit. Tax deductions are realised with this form of credit through deductible interest portions of the repayments and through the asset depreciation allowance each year. Lender fees and charges are also typically deductible.
The balance of repayments, ex interest, are not deductible.
Deductible Elements of Equipment Lease and Rent-to-Own
Leasing and equipment Rent-to-Own are off balance sheet lending products and as such, the assets cannot be depreciated by the borrowing business. These forms of credit have fully deductible monthly payments which would include the interest payable and any lending charges applicable. This simple format makes it easy to work out what benefits would be derived from an acquisition with these types of funding.
Expert Assistance in Tax-Optimised Equipment Finance
Our brokers stay up to date with all ATO rulings in regard to asset funding deductions. We will structure your funding solution to meet the requirements of your particular entity and your objectives. To start maximising your benefits in this financial year, speak with us about funding options for your upcoming acquisitions.
For loans that optimise equipment finance tax deductions, contact Jade Equipment Finance on 1300 000 003
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.