Long or short life
Firstly, consider the useful life of the equipment you’re about to purchase. Not just how long it lasts, but how long it will last in the market. Technology is evolving faster than ever before, so you might need to update regularly to remain competitive.
The next step is to consider how much time it will take before you cover the costs or break-even. If it’s a short-run break-even, you can invest in new technology as soon as it becomes available. Your equipment may then have some residual value that you can recover through resale.
Purchasing equipment can often be the simplest method. The equipment is yours and you can usually depreciate its value over a number of years. However it can deplete your cash flow in the short-run, so it would also be valuable to talk to your accountant about the viability of alternatives.
This approach can be best for large scale equipment where the initial cost exceeds your normal business cash flow capacity, or you expect to replace the equipment (for example, upgrade the vehicle or replace technologically obsolete equipment). There are a number of options available when financing the purchase of equipment:
You may choose to finance the purchase of your equipment using a traditional term loan that will normally use real estate owned by the business or directors as security. Your business can usually claim the interest costs on the loan and the depreciation on the equipment as a tax deduction.
Leasing or Hire Purchase
If you choose to use lease or hire purchase, the lender will purchase the equipment on your behalf and you will either pay a rental to use the equipment (lease) or make payments to purchase the equipment by instalments (hire purchase). Using lease or hire purchase may benefit your business due to the different treatment from term loans in terms of income tax, GST and financial accounting. Your business can generally claim the lease rental as a tax deduction. If a hire purchase is used your business can generally claim the interest costs on the loan and the depreciation on the equipment as a tax deduction. Additionally, your business may be able to claim the full GST on the hire purchase agreement as an Input Tax Credit at the commencement of the agreement.
Buy or finance?
The decision to purchase or finance equipment will depend on discussions you have with your accountant and business banker. The costs and tax-effectiveness will play a major role in the decision.
Plus, small businesses with turnover of less than $2 million may be able to access an increased tax write off on vehicle and smaller equipment purchases.
Do the numbers
We have a calculator, which will help you estimate the repayment schedule you could face:
The Australian Taxation Office also has some nifty calculators to help you work out tax deductions for your expenses:
ATO has a calculator and information to help you calculate the tax deductions for a company car.
This webinar is produced by the Davidson Institute, Westpac's home of free financial education resources, building confidence today for a better financial future.