What are the best finance options when buying new business equipment or a company car?
This is a common question and one we get asked time and time again. It would seem to be a straight-forward answer but, actually, it isn’t.
With so many financing options, determining how your tax, GST and cash flow will be impacted is imperative in helping you make the best choice.
Surprisingly, tax and interest savings are not the only concern when considering a financing option. Changes in the tax laws, available products in the market, as well as your ability to obtain and service any debt, all need to be taken into account.
By having an understanding of your financial position and your future goals, your accountant can determine the best option for you.
Not only is this likely to save you money in the long run and ‘clear up the confusion’ but the solution will be the best option to match your particular circumstance and offer you the most benefit.
There isn’t a ‘one-size-fits-all’ solution. Every business has its own particular set of circumstances.
At Forsyths, once we have worked out the best type of finance to suit your needs, we work with our professional partners to ensure you get the best available deal with the least amount of hassle.
Here we look at buying with cash, chattel mortgages, leasing, novated leases or with a hire purchase agreement:
Biggest advantage is there are no ongoing finance charges such as interest and fees. This is not such a big issue however when interest rates are low.
On the downside, though the outright purchase of a vehicle or equipment can greatly affect the cash resources of your business. If you have a lazy $60,000 in your pocket, you could put that into an asset, which will grow in value (as opposed to an asset which may be dropping in value such as a vehicle). You could also put it into trading stock, and turn it over many times, making a profit each time. CARE should be taken not to deplete your cash reserves.
Paying cash means you will get depreciation on the purchase price, and GST can be claimed in full, in the quarter you sign the purchase agreement.
There are more complications with GST and depreciation claim limits for passenger cars (based on cost of vehicle), so again it is important to check with your accountant first and not rely on the word of a salesman or advice from your mates.
This is a popular form of finance mainly because unlike other forms of financing you are actually the owner of the vehicle/equipment when you sign the contract.
This means you claim the GST in full in the quarter you sign the agreement and you get claims for depreciation and interest along with any tax concessions.
The monthly payments do not have GST on them and can’t be claimed each quarter.
The mortgages themselves are flexible and can include balloon payments at the end of the contract to help reduce the size of the payments and help plan your cash flow.
With a lease, you do not actually own the item but instead have the use of the item for a specified time in exchange for a series of payments.
At the end of the repayment schedule you can make an offer to buy the item, trade it on a replacement, extend the lease for a further term or just return the item.
Leases are cash flow friendly as there are no upfront payments/deposits and the fixed payments mean you can budget effectively. Each payment will have a GST component which you claim in the quarter you make the payment.
Each payment will be tax deductible if the usage of the item meets tax office requirements.
In recent years novated leases have become an increasingly popular option for businesses wishing to provide vehicles to employees.
Essentially, these are three way agreements where the employee enters into a lease with the finance company and the employer then enters into a deed of novation with both the employee and finance company.
This deed means the employer accepts responsibility for payments while the employee remains in their employment. If the employee leaves the responsibility reverts to them.
Vehicles can be packaged into the employee’s salary with a novated lease and have many advantages.
They add value to employee’s package at no real cost to the employer while allowing the employee some flexibility of choice of vehicle.
The other advantages are that the car is paid from pre-tax dollars for the employee, there are no administration costs for the employer and the obligations follow the employee if they leave.
This type of finance fell out of favour when GST started, because the GST could not be claimed at the beginning of the contract (this altered from 1 July 2012).
HP is a more complicated type of financing as each payment will have a different component of interest and principal. Generally you will be able to claim a greater portion of the interest in the early years of the loan.
This type of finance differs from leasing in that a third party buys the item on your behalf and hires it to you.
However ownership will become yours at the end of the payment schedule.