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Upgrade equipment or premises

Your business is growing and pushing at the seams. It may be time to upgrade and increase your capacity. Whether you’re looking at new business equipment, business vehicles or new premises, here is some general information about some of the costs and considerations to look at, before you take the step-up.

1. Market considerations

First you should consider if this is the right time for your business to expand. The answer has as much to do with market forces as the strength of your business. If prices and interest rates are low, then you may be more confident about taking out finance to grow.

2. Costs and benefits of upgrading

You’ll have to crunch some numbers and consider both sides of the ledger.

Factors to consider include:

  • What increases in sales, production and most importantly, profits, will your new investment give you over the year(s)? Consider this over the projected life of the new equipment or premises.
  • Add the amount of depreciation and interest you will be able to claim on the new equipment (getting professional tax advice where you need to), and
  • How much do you estimate you’ll receive from selling existing equipment or property?

Balance this against other factors such as:

  • The costs of purchase, lease repayments or interest on loans
  • What repair costs have you incurred with the current equipment, vehicles etc?  How much will you need to put aside to cover increasing costs?
  • How much time and money have breakdowns and repairs cost you?
  • How much profit is being held back by being in smaller business premises?

3. Hire-purchasing versus leasing

The main differences between hire-purchase and leasing are that:

With leasing, ownership remains with the vendor and you have the option of purchasing at the end. The leasing payments are generally fully tax deductible. And GST can be claimed as well.

With Hire-purchase, regular repayments are made, with the ownership reverting to you, the lessee, at the end of the contracted period. You will be able to depreciate these assets and may be able to claim interest payments as tax deductions and claim all GST upfront.

Avoid these traps:

  • When selling old equipment, vehicles etc, don’t forget to pay GST on the sale
  • If the depreciation rates are low, it may be better to lease.

When you are ready to take out asset finance then talk to your bank about what they can offer. Terms and conditions, credit criteria and fees and charges will apply, of course. Read more about business loans.

Upgrading your business equipment or premises can be complex, as can the tax implications associated with doing it. So talk to your accountant, lawyer and business banker about what would be the best business structure for you.

Next steps: Watch Purchasing Business Assets webinar

This webinar is produced by the Davidson Institute, Westpac's home of free financial education resources, building confidence today for a better financial future.


Things you should know

General advice: This information is general only and does not constitute any recommendation or advice. It is current at the time of publication, and is subject to change. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on the information, consider its appropriateness, having regard to these matters. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this document, including when considering the finance options for your business.