Popular Types of Finance: Tax Treatments

Investing in new equipment is a major business decision and requires consideration of many factors around the purchase. New or used, which brand or manufacturer, which dealer or seller to buy from, which model is best suited to your operation, the price of the equipment, where you will source the finance and what finance facility to use for the acquisition.

Business owners strive to come up with the optimum combination of these issues to achieve the best outcome in regard to costs, return on investment and realising the maximum benefits to their business in productivity and profitability.

The choice of which finance type is key to this goal especially in regard to the tax implications.

Jade offers our customers a complete range of equipment finance facilities so they have the choice of which best suits their business structure and that particular equipment acquisition. The choice of which finance type is best suited may change based on the equipment itself, the company’s business cycle, changing economic environment and changing financial objectives. The type of finance facility selected for say a motor vehicle purchase may differ from that for machinery acquisition by the same company.

Jade finance facilities include:-

Tax Deductibility

Having those all-important tax deductions are important to every business. In regard to finance products, there are differences in the tax deductibility of the different elements of the loan.

  • Rent to Own and Leasing are off balance sheet facilities, that is, the equipment is not entered on the balance sheet of the borrower. So the full amount of the monthly lease or rent payment is tax deductible as an operating expense.
  • As the equipment is entered on the balance sheet of the borrower with CHP and Chattel Mortgage the full amount of the monthly repayment is not fully tax deductible. Only the interest portion of those repayments is deductible.

Treatment of GST

GST is applied to equipment purchases at the time of purchase on the price of the equipment. GST is not charged on the interest of a loan. When the GST can be claimed and whether the lender or the borrower claims the GST differs across the finance types. This difference arises as a result of who –the borrower or the lender- is actually purchasing the equipment.

With Chattel Mortgage and CHP the borrower is the purchaser and the lender takes a mortgage over the equipment as security against the loan. When the loan is finalised that mortgage is released.

As the purchaser, the borrower (your business) is charged the GST by the seller and can claim the full amount of the GST when they submit their next BAS return.

As all the GST on that equipment has been claimed at the time of acquisition, GST is not applicable to the monthly repayments or to any balloon amount if selected.

Leasing and Rent to Own has a different treatment of GST. With these types of finance facility the lender is the ‘purchaser on paper’ of the equipment and leases or rents the equipment to the borrower. So the lender claims the initial GST on the purchase and then applies GST to the monthly payments. So the borrower pays and claims GST on each of their monthly repayments, excluding the interest. When you set up your loan contract, your Jade Equipment Finance consultant or your accountant can advise you of the exact amount of GST in each monthly repayment so you have the figures to enter into your accounts and BAS statement.

Depreciation

Depreciation is another tax deduction for business and is determined by ATO rulings. With Leasing and Rent to Own the equipment is not entered on your (the borrower) balance sheet and as such, depreciation of the equipment is not applicable.

With CHP and Chattel Mortgage the equipment is entered on your balance sheet so you can realise the depreciation. As you don’t get the tax deduction on the monthly repayments, this may be seen as the tax trade-off.

Government initiatives such as the current Instant Asset Write-Off on offer can also present tax benefits. These benefits will be dependent on the IAWO guidelines in relation to the value of the asset and the turnover of the business.

Sourcing the Best Most Suitable Finance for Your Business

With so many finance products and their varying tax implications available, how do you source the option that is right for your business and for this particular equipment purchase? We recommend that the decision around which finance product best suits your business should be made in consultation with your accountant. The type of finance is in part determined by the accounting method used – either the cash or accruals method – your accountant will know which one your business implements. They should also be across your financial objectives in regard to tax implications.

With that decision made, your Jade Equipment Finance consultant can source you the cheapest offer for your equipment finance to optimise the benefits across the entire purchase finance package.

To discuss your options in regard to equipment finance, contact Jade Equipment Finance on 1300 000 003

DISCLAIMER: THE INFORMATION PROVIDED IN THIS ARTICLE IS FOR GENERAL INFORMATIVE PURPOSES AND NOT INTENDED AS FINANCE ADVICE. INDIVIDUALS SHOULD REFER TO THEIR FINANCIAL ADVISOR OR ACCOUNTANT FOR ADVICE IN REGARD TO THEIR INDIVIDUAL FINANCIAL DECISIONS AND SPECIFIC CIRCUMSTANCES. DETAILS IN REGARD TO GOODS, SERVICES AND GOVERNMENT OFFERS AND POLICIES HAS BEEN SOURCED FROM PUBLIC MANUFACTURER AND SUPPLIER WEBSITES AND GOVERNMENT RESOURCES. NO LIABILITY IS ACCEPTED FOR ANY ERRORS OR MISREPRESENTATION OF INFORMATION AND DATA OBTAINED FROM THESE SOURCES.