|
Chattel Mortgage
As an alternative to leasing or hire purchase, a Chattel Mortgage or Bill of Sales arrangement is a fixed interest rate loan with security provided by a mortgage over the relevant equipment / vehicle etc. This solution is particularly favourable for those businesses that wish to retain the equipment at the end of the term and account for GST on a cash basis. A Chattel Mortgage, unlike a lease or Hire Purchase Agreement, gives you immediate ownership of the asset from the beginning of the loan. The contract or repayments do not attract GST or stamp duty.
Residual/Balloon: You can choose to have a balloon payment as the last payment of your finance agreement, but it also can be the first month's payment. This balloon payment is between 10% - 40% of the cost price. A balloon payment allows for lower monthly payments and leaves you with more working capital to run your business.
Accounting Benefits: You can elect to pay the GST portion of the invoice price from working capital or fund it as part of the loan amount (the loan can be structured so that when the income tax credit is received, from your next BAS lodegment, it is repaid off the loan to reduce the debt). The interest components of all repayments are fully tax deductible provided goods are used 100% for business purposes. The depreciation on the goods is fully tax deductible.
Term: The term of finance agreement can be from 1 - 7 years
Leasing
There are different types of leases, but generally leasing is used for financing the purchase of assets like cars, telephones, computers, equipment and other machinery etc. It is a popular form of financing as it saves spending the business' capital, but of course the borrower doesn't own the goods and in effect pays "rental" to the financier. The full lease payment is tax deductible if used 100% for business, but the value of the item cannot depreciate over time. A lease generally requires that a pre-agreed amount (balloon / residual) will be owing at the expiry of the term.
Leasing Versus Buying (Equipment, Vehicles, Plant, Computers) Leasing is really just another form of borrowing to finance something. But unlike loan finance - where you take ownership of the equipment/asset and offer it or something else as security to the financier as security, lease finance sees the financier take ownership and gives you the use of the goods under contract for a specified period. There are two main issues affecting the cost of your new asset and the returns it generates. The first is the interest rate and repayment structure you choose, the second is the tax implications involved. Your first objective is to structure competitive financing freeing up your working capital and generally you would do this in conjunction with the advice of your accountant or relevant advisor. You don't want to have cash locked up in depreciating assets as it reduces your sources of flexible capital you can call on at any time. There are different methods of financing or leasing dependent upon your business need. Here are some considerations:
The effect on your cash flow - When you're looking to finance new equipment, your first consideration should be how it will impact your business. The best way to assess this is with the help of your accountant, to prepare a cash flow report so you can easily see how the new financing will affect your bottom line. Some points worth keeping in mind when setting up a cash flow statement: Matching repayments with the useful life of the asset
Before organising finance, you should also consider the expected productive life of an asset. That way you can upgrade or add to your asset so you won't finish paying for a piece of equipment long after its useful days are over. Alternatively, you don't want to be paying for an asset too quickly and putting unnecessary strain on your cash flow.
Taxation Notes - If your investment in new plant and equipment produces assessable income, there are two main tax considerations that could influence your finance choice: the tax deductibility of loan interest or rental payments and the depreciation of the equipment itself.
Deductibility - if you use a hire purchase or equipment loan arrangement to acquire a new asset, the loan charges and interest component of your repayments may be tax deductible. Typically within the repayments, the interest component is usually higher than the principal during the early part of the agreement. This can lead to higher deductions in this period. With a finance lease however, the entire amount of your rental payments may be treated as a tax-deductible expense. That is why you should check that if you don't require high deductions in the early life of the goods you acquire, it may be prudent to lease the goods as the payments are equal over the life of the lease.
Depreciation - Most assets depreciate in value over time. This could offer tax advantages because the annual depreciation could be an allowable tax deduction. If you finance an asset with an equipment loan, you legally own the asset and lenders take a mortgage over the asset as security. With a hire purchase, you own the asset after you have made all the repayments. In both cases however, you can claim depreciation and interest as a tax deduction. On the other hand, if you lease an asset via a finance lease you cannot claim depreciation, as the financier is the legal owner of the asset. But, the rental payments may be tax deductible. (Please refer to the ATO at: www.ato.gov.au/businesses for further information). You should always seek advice from your accountant on the depreciation and taxation rules and how they apply to your particular business and equipment.
Hire Purchase Agreement
A Hire Purchase arrangement is an agreement to purchase a vehicle subject to payment terms to the finance company. You will automatically own the goods when you pay the final payment, different to a lease.
Residual/Balloon: You can choose to have a balloon payment as the last payment of your finance agreement. This balloon payment is usually between 10% - 40% of the cost price, but may be as low as one dollar, dependent upon the equipment. This decision is usually influenced by the level of monthly payments you are comfortable with.
Accounting Benefits: For income tax and GST purposes, a hire purchase agreement is treated very differently to a finance or operating lease. Under GST, a hire purchase agreement is treated as a "taxable supply" on the commencement of the arrangement between the hirer and the financier.
With a hire purchase arrangement, there is deemed to be a sale of the equipment from the financier to the hirer, the GST liability arises at the commencement of the arrangement. Even though the total amount payable under the agreement will be paid by periodic installments and ownership of the equipment will not pass to the hirer until the final repayment. The financier, being the supplier, is responsible for the payment of the GST liability. Therefore the amount financed is inclusive of GST, and your monthly repayments are not subject to GST unless you are on a cash basis for GST. (Seek advice from your accountant). You can claim the interest component of all repayments. The depreciation of the goods is fully tax deductible providing goods are used 100% for business purposes. The goods you purchase become an asset that shows on your balance sheet for your business. The goods will also be a contingent liability until the end of the finance agreement. You may be liable to pay fringe benefits tax and should refer to the ATO at: www.ato.gov.au/businesses for further information) You should always seek advice from your accountant on the rules and how they apply to your particular business and equipment.
Term: The term of finance agreement can be from 1 - 5 years
Commercial Hire Purchase
Hire Purchase is similar to leasing except that the item is seen to be owned by the borrower. This means that only the interest payments made on the purchase are tax deductible. Depreciation is also allowed as a tax deduction. The interest rates on both hire purchase and lease are fixed for the term of the agreement.
Debtor or Cash Flow Finance / Factoring
If you're a successful wholesaler, manufacturer or service-based business who sells on credit terms, with debtor finance, you can borrow funds using the trade value of your debtors as collateral. This allows you to gain access to your accounts receivable prior to actually receiving the funds, maximising your business cash flow.To qualify for debtor finance, you'll usually need a minimum amount of annual turnover (usually in the hundreds of thousands range) and your business will need an established credit history. While this type of loan is harder to get than traditional loans, it may well be worth the effort if your company qualifies for one.
Low Doc/No Doc Loans
If you have difficulty showing documentation to demonstrate your income, or you have limited business financials, a low document or no document loan might be a solution for you. Many self employed business operators have difficulty substantiating income or producing full records of their income. Interest rate can be around the standard variable interest rate depending on the loan-to-value ratio, and in some instances these rates will step down after a period of on-time repayments.
Typically, you will be required to complete a simple income declaration form to accompany the loan application. No tax returns or financial reports are usually required.
|
