Leasing Versus Buying
(Equipment, Vehicles, Plant, Computers) Leasing is really just another form of borrowing
to finance something. But unlike loan finance - where you take ownership of the
equipment/asset and offer it or something else as security to the financier as security,
lease finance sees the financier take ownership and gives you the use of the goods
under contract for a specified period. There are two main issues affecting the cost
of your new asset and the returns it generates. The first is the interest rate and
repayment structure you choose, the second is the tax implications involved.
Your first objective is to structure competitive financing freeing up your working
capital and generally you would do this in conjunction with the advice of your accountant
or relevant advisor. Release cash that would be normally locked up in depreciating
assets as it reduces your sources of flexible capital you can call on at any time.
There are different methods of financing or leasing dependent upon your business
need.
Taxation Notes
If your investment in new plant and equipment produces assessable income, there
are two main tax considerations that could influence your finance choice: the tax
deductibility of loan interest or rental payments and the depreciation of the equipment
itself.
Deductibility
If you use a hire purchase or equipment loan arrangement to acquire a new asset,
the loan charges and interest component of your repayments may be tax deductible.
Typically within the repayments, the interest component is usually higher than the
principal during the early part of the agreement. This can lead to higher deductions
in this period. With a finance lease however, the entire amount of your rental payments
may be treated as a tax-deductible expense.
That is why you should check that if you don't require high deductions in the early
life of the goods you acquire, it may be prudent to lease the goods as the payments
are equal over the life of the lease.
Depriciation
Most assets depreciate in value over time. This could offer tax advantages because
the annual depreciation could be an allowable tax deduction.
If you finance an asset with an equipment loan, you legally own the asset and lenders
take a mortgage over the asset as security. With a hire purchase, you own the asset
after you have made all the repayments. In both cases however, you can claim depreciation
and interest as a tax deduction.
On the other hand, if you lease an asset via a finance lease you cannot claim depreciation,
as the financier is the legal owner of the asset. But, the rental payments may be
tax deductible.
(Please refer to the ATO at
www.ato.gov.au/businesses for further information).
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