If there are two things that can motivate business operators to activate and accelerate equipment purchases they must be the prospect of achieving a tax deduction and the prospect of paying less on the equipment finance. At the moment, both tax deductions and lower loan repayments are a possibility for operators that acquire new equipment with suitable equipment finance prior to 30 June.
EOFY is always a busy time for asset purchases as businesses seek to maximise their tax deductions to minimise payable tax in that financial year. That prospect has increased significance this year with the accelerated asset depreciation measures – IAWO and temporary full expensing that are currently in place. Measures which may also trigger the opportunity for loss carry back which may result in a tax refund.
An added incentive to move fast at the moment is the prospect of the RBA lifting interest rates again at its upcoming early June meeting. Additional rises were indicated by Governor Lowe at the May meeting and some analysts are forecasting rises several times in 2022. Delaying machinery purchases with finance may mean a higher interest rate on the loan and as such higher loan repayments.
Tax Deductible Equipment Finance
For those less familiar with asset finance and tax rulings, it may be assumed that when an asset such as equipment is acquired, then the purchase is a business tax expense and hence a tax deduction which can be claimed in that tax year. That is not actually how the tax system works.
The finance used to purchase the equipment determines how, when and the amount of a tax deduction that can be realised by the business. The finance products are: Equipment Loan or Chattel Mortgage, Hire Purchase, Equipment Rent to Own and Equipment Leasing. Tax deductible elements and timing of tax deductions vary with finance products.
We’ll give a brief overview of the key points in regard to Chattel Mortgage and Leasing as the two most popular finance products for both GST and business income tax.
- Interest payable on a loan is fully deductible across all finance products. The amount of interest paid on a loan in a financial year would be claimed at end of year in the tax return. No GST is charged on finance interest.
- GST can be claimed in full at time of purchase on ensuing BAS for Chattel Mortgage. With quarterly and annual BAS payments due in July, new purchases may deliver a significant reduction in GST payable for that period for the business. A reduction which could ease the burden on cash flow.
- With Equipment Leasing and Rent to Own, the GST is added to the monthly lease payments. The GST is then claimed on the relevant and corresponding Business Activity Statement for businesses that are registered for GST.
- Monthly lease payments with Leasing and Rent to Buy are treated as an operating expense and tax deductible.
- Only the interest portion of finance repayments on Chattel Mortgage are deductible.
- Equipment purchased with Chattel Mortgage can be depreciated under ATO rulings and the depreciation amount represents a tax deduction.
Tax deductions and depreciation are accounted for in the preparation of the annual business accounts and the business tax return.
Special Tax Measures on the Table
For the financial year 2021/22 temporary tax measures are in place which have relevance for equipment finance. Instant Asset Write-off or temporary full expensing are available for eligible enterprises for the acquisition of assets eligible under the criteria, which are purchased and operational in that enterprise prior to 30 June. Such assets can include plant, machinery and equipment.
These accelerated asset depreciation measures refer to depreciation of the asset as a tax deduction in the same financial year that the equipment was acquired rather than incrementally over several years. In order to be in a position to take of these tax measures the equipment or asset must be acquired with suitable finance. That is finance that allows for the asset to be depreciated – Chattel Mortgage.
With many items of equipment, especially in earth moving, civil construction and manufacturing of significant value, IAWO can represent a very significant tax deduction to the business. A deduction which may result in the business recording a loss for the year. Depending on the profit/loss recorded in earlier years as designated by the ATO, this may open the door to utilising the loss carry back measure.
But remember, to take advantage of these temporary measures this year the new machinery must be working in the business by the deadline of 30 June. Acquisitions made in the next financial year would be realised in the 22/23 tax return.
Equipment Finance Interest Rate Scenario
As we noted in the intro, the other compelling motivator for businesses to acquire machinery with finance asap is the prospect of further rate rises. This may occur as early as the RBA June meeting and there is the prospect for a number of rises in this calendar year.
A cash rate rise triggers increases across the lending scene including in the equipment finance sector. Review our current rates and use the calculator to obtain a basic outlook of what repayments may look like if the finance was priced at a higher rate – a rate possibly applicable following a RBA rise.
Motivated to move on equipment acquisitions? Our team of consultants is ready to assist in acquiring the cheapest equipment finance for your purchase.
Contact Jade Equipment Finance on 1300 000 003 for cheap equipment finance at better interest rate
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.