Tax effective financing options for machinery purchases

AUTHOR

Tax planning should be a top priority for the 2022 year in light of WA’s record harvest and expected higher profits.

So if you're planning to purchase machinery in the near future for your business, you might want to consider these tax effective financing options.

If your aggregated turnover is less than $5 billion, you may be eligible for temporary full expensing permissible business assets purchased between 6 October 2020 and 30 June 2023.

You may choose to opt out of the temporary If your aggregated turnover is less than $5 billion, you may be eligible for temporary full expensing permissible business assets purchased between 6 October 2020 and 30 June 2023. full expensing rules on an asset-by-asset basis, and treat the asset under the ‘normal’ depreciation rates, effectively spreading the tax deduction on the asset over the life of the asset.

Alternatively, you could choose a finance lease when purchasing and financing an asset, rather than a chattel mortgage. This will spread the tax deduction over the finance term of the lease, rather than claiming the full amount in one year.

With a Chattel Mortgage, the lender advances the money to you to buy the asset and register a ‘mortgage’ over the asset as security for the loan. You may choose to opt out of the temporary full expensing rules on an asset-by-asset basis, and treat the asset under the ‘normal’ depreciation rates, effectively spreading the tax deduction on the asset over the life of the asset. When the loan is fully repaid, the charge is removed, and you have a clear title to the asset.

With a Finance Lease, it is the financier who owns the asset. You then lease the asset from the financier for a fixed payment over a set period.

At the end of the contract, you will have the option to purchase the asset for an agreed price.

Differences between a Chattel Mortgage and a Finance Lease:

Chattel Mortgage

Finance Lease

You own the asset
The purchase price includes GST
Can include a balloon payment to reduce repayments
Able to make an upfront deposit to reduce the amount financed
Interest and depreciation are tax deductible
When the loan is repaid in full, you get a clear title to the asset
No GST is charged on repayments or the contract balloon amount
If you are registered for GST, you can claim the GST in the purchase price on your next Business Activity Statement

The financier owns the asset
The financier claims the GST, which means the amount financed is lower
There is a pre-determined residual value at the end of the term
You're unable to make an upfront deposit to reduce the amount financed
Lease payments are tax deductible
Usually, you have the right to purchase the asset at the end of the contract
GST is charged on repayments and the residual
If you are registered for GST, you can claim the GST on payments and residual in the period you are making the payments

The main difference between these two financing options is ownership of the asset and the tax implications flowing from that.

If you are planning to purchase multiple assets before 30 June 2022, and would like to shift some of your tax deductions into the following years, a finance lease may be a great option.

Contact the expert team at RSM Australia and find out more about financing options available for your machinery. To find out more , please contact your local RSM adviser today.