How do you finance equipment? Quite simply in fact!
New equipment including, hoists, wheel balancers, industry specific software and other equipment is easy to finance and your finance broker or financial institution will help you apply, but what happens when you want to finance second hand goods or equipment bought privately? No problem, depending on the age and the state of the equipment. Each finance company has their own classifications and your finance broker can help you find the right finance company to fund your purchase.
Buying equipment privately
Buying equipment privately can be wrought with problems, but if you do a little digging you can reduce your risk.
The personal property security register (http://www.ppsr.gov.au), is a great way to start your checking. See if the goods are encumbered (currently under finance), if so the finance will have to be paid out at settlement of your purchase so that you have clear title. You will have to do your own checking on the state of the equipment but your finance broker can provide you with the right advice
When you know what equipment you want to purchase, then how are you going to pay for it?
The simplest option is to purchase the equipment straight out, however, this may not be the best use of your working capital and may put undue pressure on your cash flow. While you will still be able to claim the depreciation as long as the equipment is used to generate assessable income, you will not be able to take advantage of any taxation benefits that may otherwise be available to your business through finance.
The equipment is then purchased by the lease provider (finance company) and leased to you for an agreed term, commonly two to five years.
With the introduction of GST, the bank as owner of the equipment may be able to obtain an input tax credit for the amount of GST included in the original purchase price of the equipment therefore, whilst the supplier of the goods will receive full payment for the purchase price, the amount financed is based on the original purchase price net of GST.
The predetermined residual values are based on Australian Tax Office (ATO) effective life for various equipment. One of the things that have made leases so attractive in the past is that lease rentals are usually tax deductible as long as the equipment is used to generate assessable income whilst the GST component of the rental may also be claimed in the businesses next Business Activity Statement (BAS).
The Asset purchase (or commercial hire purchase as they are sometimes referred) facility is similar to the Finance Lease facility in that the finance provider, owns the equipment for the term (commonly two to five years) of the agreement however, once the final payment is made your business immediately assumes ownership of the equipment.
With an Asset Purchase facility the interest and depreciation components are usually tax deductible providing the equipment is used to generate assessable income. It should also be noted that the repayments under an Asset Purchase facility can be higher than rentals under a Finance Lease facility over the same term if there is no final Balloon payment built into the finance structure. The ATO has also now deemed the interest on a term purchase to be a “hire charge” and now attracts 10% GST. The GST on the purchase price of the goods and GST on the terms charges can be claimed back during the next BAS period.
Equipment loan/ chattel mortgage
As the name suggests, this means of financing the acquisition of equipment involves the provision of security to the Bank over nominated chattels (i.e. various plant, equipment and motor vehicle etc) by way of an Equipment Loan Agreement.
In simple terms, this type of finance is structured in the same manner as a property mortgage, with the equipment owned by the business, but allocated as security against the loan.
As with an Asset Purchase facility, the interest and depreciation components are usually tax deductible provided that the equipment to be financed is used to generate assessable income. Terms for finance also normally range from two to five years.
Remember, in all situations, what is best for your business will very much depend on your circumstances at the time.
NOTE: As the taxation and accounting treatments of various finance products may vary, we recommend you seek independent expert advice before choosing an option.
Article written by Tina Clark and Kevin Wickenden. Australian Car Mechanic Magazine Jul/Aug edition