The Finance Maze – Operating Leases

Matt — Fri, 23 Oct 2009 06:36:58 +0000

Moving on from consumer finance to small business and corporate finance, we’ll look at the example of purchasing IT equipment. Rental or operating lease facilities are often ideal for these groups as they need to be up to date with technology to keep pace with their competitors.

Rental Products

The rental products available in the market allow the small business to lease (off balance sheet) IT equipment which will no doubt be out of date in 2 to 3 years time. This product allows the business “the use” of the current IT equipment and at the end of the finance term they just hand it back and upgrade to a more current product. A fixed monthly payment is calculated at the time of purchase.

The advantage of this type of lending is that the business can maintain cash reserves for normal trading cash flow rather than using their cash to purchase equipment outright which will be obsolete in a few years time.

Dollar Buy Back

Some financiers offer a $1 buyback at the end of the term which is ideal for items with a life span of more than 5 years; this allows the business to spread the cost over a period of time to ease cash flow.

Rental can be reasonably expensive due to the fact that the items are worth nothing at the end of the term. This is because technology evolves and the financier ends up with an obsolete piece of equipment which they then have to dispose of.

Some of the lenders in this industry are quite switched on and are able to package together say a container full of refurbished second hand photo copiers and send them to third world countries. This also helps the retailers who are trying to sell new product and do not have to compete against their own refurbished product in the market.

Other Options

The other thing to consider in the current market is that it may be more beneficial to purchase the larger dollar amount items on a Chattel Mortgage and claim the Australian Governments Investment Allowance (in place until December 31, 2009). Your accountant will be able to advise you if this is the best choice.

Good News for Aussie Business Owners

Meredith — Fri, 05 Jun 2009 00:16:42 +0000

The long awaited Small Business and General Business Tax Break legislation was passed by the Senate last month.

Small Business Investment Allowance

In summary, businesses with turnover less than $2 million will be able to claim a 50% tax deduction on any purchases of new equipment costing more than $1,000. This is up from the proposed 30% and has been extended out by 6 months. The Investment Allowance applies to most types of new plant and equipment, including motor vehicles and computer equipment. To be eligible, the equipment must be purchased between 13 December 2008 and 31 December 2009, and be installed and ready for use by 31 December 2010.

Medium to Large Business Investment Allowance

Businesses with turnover more than $2 million will be able to claim a 30% tax deduction on any purchases of new equipment costing more than $10,000 made between 13 December 2008 and 30 June 2009 and installed ready for use by 30 June 2010.

An additional 10% tax deduction is available when equipment is purchased either:

between 13 December 2008 and 30 June 2009 and ready for use between 1 July and 31 December 2010; or
between 1 July and 31 December 2009 and ready for use by 31 December 2010.

Eligibility for the Investment Allowance

Provided all of the eligibility criteria are satisfied, you can claim the Investment Allowance as a tax deduction in your income tax return for the income year in which you start to use an eligible asset or have it installed ready for use. The Investment Allowance provides a bonus tax deduction – it is not a rebate or a refundable tax offset. Note that this is not a rebate entitling you to a cheque refund.

Example:

A new truck costing $100,000 purchased by a small business:

50% tax deduction = $50,000

If your business tax rate is 30%, your tax bill will be reduced by $15,000 ($50,000 x 30%)

Equipment financed with commercial loans (chattel mortgage) or commercial hire purchase will be eligible for the allowance. For further information on the Investment Allowance, please contact us.