When preparing tax returns it is obvious that too many clients are not choosing the right type of asset finance.
Getting advice in this area instead of using the sales team from where you purchaser a car, or the local bank can save both time and money. Time that may be better off used to invest in your business.
Getting the right finance can also reduce the risk of owning obsolete equipment at the end of the period. Using tax effective finance for vehicles for commercial and personal use to heavy machinery and shop or an office fit-out has a different outcome depending on rate and the asset and ownership structures.
When financing equipment such as furniture and technology for offices, medical institutions, retail shops, warehouses and factories again it is not just about rate.
Our brokers suggest when considering asset finance options, ask yourself:
- How much capital do I need to grow my business?
- When do I need to smooth the bumps in my cash flow?
- What are the tax outcomes of asset financing?
- How long will I need the equipment and will I need to upgrade it?
- Is technology rapidly changing in my industry?
- Do I want to ‘finance to own’ or ‘finance to return’my asset?
Generally speaking, asset finance options include: Commercial Hire Purchases; Financial and Operating Leases; Chattel Mortgages; Novated Leases; and Technology Rentals. Each is suited to different commercial circumstances, so when considering your options, you may want to talk to your accountant or tax advisor.
Below is an introduction to these main types of asset finance.
COMMERCIAL HIRE PURCHASE
Commercial Hire Purchase
With this type of finance, you hire and use the asset until the last payment. When you make the final instalment, title of the asset transfers to you. You can tailor payment options, including the loan period, a deposit and a larger final balloon payment. To help manage your cash flow, structured payments can be established according to your cash flow.
Chattel Mortgages are a popular finance solution where you own the asset from the outset and your loan agreement is secured by the asset. You can tailor your loan payments by choosing the term — typically up to five years. Other payment options can include a deposit and a larger final instalment. You can also structure payments to free up cash flow at the times of year you need it most.
With a Finance Lease, the financier owns the asset however you bear the risk of disposal (of the asset) at the end of lease. This type of lease can benefit businesses that need the latest vehicles or equipment without tying up a large amount of capital. You can choose lease payments in advance or arrears and terms up to five years. A residual value is required in line with the asset’s use and the Australian Taxation Office’s guidelines.
If you want to include a vehicle in your salary package, a Novated Lease can help. The financier owns the asset, while you and your employer sign a novation agreement to share the responsibilities of the loan. Typically loan terms are from 12 months to 5 years. Monthly lease payments and a final residual payment are based on your circumstances and guidelines set by the Australian Taxation Office. If you are interested in a Novated Lease, talk to your HR department for options.
Operating Leases can be used to fund a number of different assets. Payments towards this type of finance can be considered operating costs and will not appear as a liability on your balance sheet: You can reduce the risk of owning obsolete equipment.
FLEET OPERATING LEASE
Fleet Operating Lease
With this type of finance, the financier owns the vehicle and the client returns it at the end of the term, usually from 12 months to 5 years. When leasing a vehicle, the fixed monthly payments typically cover registration, insurance, tyres and scheduled servicing and maintenance. For a small business, a Fleet Operating Lease can help free up time and resources.
TECHNOLOGY RENTALS / LEASE
Technology can change quickly and often the large up-front costs of purchasing the latest equipment will make a big dent in your cash flow. Renting rather than owning technology can help reduce the risk of owning obsolete equipment while preserving cash to grow your business.
Similar to a Fleet Lease, the financier owns the equipment and the client returns it at the end of the term, usually within 3 years. The term and payment frequency of rental agreements can often be adjusted to meet a company’s budget and unique business requirements.
There are a range of different forms of commercial loans and leases available in the market and these are governed by certain conditions and circumstances, which may exclude you. If you do not have a finance broker, we have one we recommend that works closely with accountants and their clients.
If you would like to get an introduction let us know and we can introduce you.
Treble Accountants can provide advise to help you manage your business assets.of asset
Disclaimer: This article is the expressed opinion of the author, Mark Rider, Chief Investment Officer, Wealth Australia, ANZ. If this article is of interest please discuss further with your financial adviser. The information/advice (including taxation) on this website is General Advice Only. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Millennium3 Financial Services Pty Ltd ABN 61 094 529 987 AFSL 244252.