Investing in new equipment and machinery can be motivated by a number of factors – upgrading obsolete and outdated machinery, to achieve greater efficiency, to facilitate expansion and growth and in general, to improve the productivity of operations with new tech and innovation. But the overall driving reason for many is to increase the profitability of the business. These objectives can be boosted by selecting the appropriate equipment finance to take advantage of tax deductions.
For this and next financial year, instant asset write-off and temporary full expensing can be utilised by businesses that meet eligibility criteria for eligible equipment acquisitions. These temporary tax measures, known in general terms as accelerated asset depreciation measures, can represent significant tax deductions. The effective utilisation of temporary full expensing for equipment, plant and machinery acquisitions is linked to the choice of equipment finance selected.
The features and structure of the finance product need to ensure that the equipment is a depreciable asset. This relates to the accounting method and approach taken by the business. Many businesses will leave it to their accountant to advise and explain such decisions, a move we strongly support. However, we appreciate there are others that may choose to minimise their accounting fees by minimising the services they opt-in to from their accounting firm.
For those that would appreciate an understanding of temporary full expensing and how they may best realise the benefits through finance selection, we provide this explainer.
Accelerated Asset Depreciation Measures
When buying new plant, machinery and equipment for a business, the goods would generally be considered a tax deductible purchase. But the entire price of the goods is not deductible immediately at the same time or in the same accounting period as the purchase.
Assets are depreciated – as in a tax deduction allowed, as a set percentage of the value over a set number of years. Depending on the price of the equipment it may take several years to fully tax deduct the cost.
Accelerated asset depreciation measures such as Instant Asset Write-off and temporary full expensing allow an accelerated (faster) depreciation (tax deductibility) of the value of purchased assets. Accelerated meaning faster than under the normal tax schedules for depreciation of assets.
These measures are introduced by governments and managed through the ATO for limited time periods, hence the term ‘temporary’, to achieve an economic objective. In the case of the current measures, the objective being to stimulate the economy by making business investment in assets more attractive, during the pandemic economic downturn.
The current temporary full expensing is available through to 30 June 2023. The measure allows business that meet the specific criteria to fully deduct the entire amount of purchases of equipment that also meet the criteria in the financial year of purchase.
This represents a much greater tax deduction than would otherwise be available. More deductions means a lower taxable income and less tax payable for that year. The benefit is realised on the books when the EOFY tax return is prepared.
Eligibility criteria and additional details recently issued by the ATO can be reviewed at the ATO website.
While there has been a change of government as the result of the federal election, it would not be anticipated that the new Treasurer would wind back this measure.
Selection of Equipment Finance
The criteria in relation to the equipment of key significance is that the equipment must be depreciable. That means the business must retain ownership of the goods. When selecting the type of finance, that point is critical.
With Equipment Lease, the ownership of the equipment stays with the lender. The borrower makes tax deductible lease payments.
However, with Chattel Mortgage, the ownership transfers directly to the business from the supplier on settlement of the finance and purchase contracts. This entitles the business to depreciate the goods in line with the ATO rulings at that time.
While business owners should always discuss finance selection with their accountant, in general terms, Chattel Mortgage is widely suited to many types of businesses from the smallest to the largest. It is also available through our No Docs Equipment Loans, Low Docs Equipment Loans for those businesses that require Bad Credit Equipment Finance.
Accessing Fast Chattel Mortgage Equipment Finance
Another key aspect of temporary full expensing is the timing. The tax deduction is available in the financial year that the equipment is acquired. With EOFY fast approaching, those looking to realise that benefit in 2021/22, you only have a matter of weeks to purchase the goods and secure Chattel Mortgage finance.
An additional compelling factor to move quickly is the current interest rate scenario. While Chattel Mortgage does offer the lowest rate compared with Lease and Rent to Own, all lending rates are subject to RBA decisions.
The RBA moved on rates in May and is set to do so again. So securing equipment finance sooner rather than waiting could be a cost-saving decision.
Our Jade Equipment Finance consultants handle the entire loan sourcing, negotiating and securing process for our clients. And we can act quickly. To capitalise on the current tax benefits available on equipment purchases and be ahead of future rate rises, contact us to start the finance application process.
Contact Jade Equipment Finance on 1300 000 003 for Chattel Mortgage 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.