The end of financial year is always a popular time to consider finances and new equipment needs, with clear tax advantages to making big ticket purchases by June 30. This is especially true where you will benefit from deductions for your business or possible eligibility for an instant tax write-off. Small businesses in particular should begin the process to finance new equipment now, as the ATO currently states the $30,000 Instant Tax Write-Off will revert to $1000 on July 1 this year, leaving limited time to take advantage of this benefit.
Equipment can be expensive to purchase and maintain, yet essential to your business. You may have identified outdated or inefficient items that need replacing, or new technology that could boost future profitability. Growing your business assets as June 30 approaches is a good idea, yet there are some important things to consider, such as:
• When will you need the item? Larger ticket items like machines and trucks can incur longer approval times and can also take some time to be made to order.
• What type of finance best suits your needs? With many finance providers in the market offering different terms, it’s important to do your research –
o How quickly can they finance your equipment and how busy will they be as EOFY draws nearer?
o Can they advise you regarding market fluctuations and manufacturer after-market support?
o How flexible are their terms and can they customize a contract to suit your needs?
• $30,000 instant tax write-off changes – from July 1, 2020, the instant tax write-off available to small businesses is expected to revert to $1000, meaning you only have a few months to take advantage of this opportunity.
Lease or Buy?
Leasing enables you to effectively borrow your new asset under a contract, sometimes with an option to buy. Leasing offers a reduced commitment, as well as the advantage of being easy to upgrade your asset at the conclusion of your lease term. In addition, by choosing leasing, you can expect:
• Little or no upfront outlay required, reducing the impact to your cashflow
• Payments are predictable and in most cases tax deductible
• Expensive technology and asset upgrades are more accessible
• Greater flexibility than outright purchase, with the potential to return or upgrade the equipment before the end of lease, or event to purchase it outright during the lease term.
For businesses using highly technical equipment or wanting to commit funds to expansion, leasing can be especially attractive. There are also disadvantages however, including:
• Possible restrictions on how you can use the asset
• Potential penalties for breaking leasing contracts
• More costly over the long term
Buying means you own the asset outright, allowing you to order the equipment to your specifications, or modify it down the track should you wish. Where you don’t have sufficient cash, a financier can help and often use the asset itself as collateral until you repay your loan. Finance can be worth considering even where you can afford the cash purchase price in order to free up more of your working capital to grow other areas of your business.
There are many different equipment finance solutions available that offer a variety of advantages over cash purchases, including:
• Schedule payments around your other financial commitments and anticipated cashflow
• Claim tax deductions
• Equipment loans generally don’t require additional security
• Range of repayment options available, with packages able to be tailored to suit your budget and business needs
• Keep up to date with the latest equipment
Potential Tax Benefits
For any equipment finance arrangement, there are a number of potential tax benefits available. Considering the available options with your accountant or finance advisor in order to determine which product is the most tax efficient for your business is recommended.
The $30,000 Instant Asset Write-Off allows Australian small businesses who have purchased and installed or used an asset within this financial year to instantly claim up to $30,000. Purchases will need to made prior to June 30 as failing a last minute extension, the instant asset write-off reverts to $1000 from July 1, 2020. To find out if you are eligible, contact the ATO or visit their website.
Tax Deductions are available on most lease payments and loans to purchase depreciating assets. Most operating and finance lease payments are fully tax deductible, whereas purchases via a chattel mortgage or commercial hire purchase agreement are entitled to tax deductions only for the interest payable on the loan. However, purchase agreements also attract depreciation opportunities not available under lease structures as outlined below.
Asset Depreciation is when you claim the cost of a capital asset (as well as cost to transport or install it) over time to reflect its decline in value. Many assets are able to be depreciated if they have a limited effective life and can reasonably be expected to decline in value over the time used. Here’s what you need to know:
• Asset deprecication does not apply to less tangible assets such as stocks and land.
• Deductions are generally only available to the owner of the asset but in the case of an asset that has been financed, this is usually treated as a notional sale of goods, ensuring the hire purchaser is entitled to the deduction.
• Deductions are limited to the extent the asset is used to earn income for your business. For example, if you purchase a vehicle that you use 60% of the time for business, and 40% for private purposes, you can only claim 60% of its total depreciation for the year.
Getting ready for June 30
Whether leasing or buying, it’s essential to go over your business finances carefully with your accountant to ensure you can afford asset upgrades or replacements. Key things to consider:
- June 30 tends to creep up on businesses, ensure you are prepared well in advance so you have a clear understanding of where your business stands financially.
- Work with your accountant or financial advisor to determine the best way to acquire new assets.
- If considering new asset purchase or lease, look into the lead times for machinery customisation, order and delivery.
- Consider the time required for the approval process if financing assets, and factor this in so there are no unforeseen delays with accessing vital new equipment.
- Maximise the benefit to your company at tax time by checking to see what deductions you are entitled to and how different assets can be depreciated.
- Don’t tie up your cashflow on new purchases, ensure you can claim an immediate tax deduction.
- Ensure any new assets are properly insured against loss, theft, breakdown or damage, as well as any loss of income that may result.
- Get professional advice before entering into any finance contracts to understand your terms and security of your ownership.
Take the next step
Making the decision to finance a new asset is something that requires careful analysis of the potential benefits vs your associated outgoings. Whether you choose to buy or lease, you need to consider more than just the purchase price – things such as ongoing maintenance commitments and running expenses, and the lifespan of the equipment you are acquiring are critical factors in your decision. By working with a finance professional you trust and who understands your business, you can feel confident in choosing the right combination of asset procurement options to suit your needs.
The team at Forefront Finance have been building tailored finance solutions for individuals and small businesses for the past 10 years. Through their market expertise and strong lender relationships, they deliver financial loans, support and advice that can grow with your business as its needs change. For more information visit forefrontfinance.com.au