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Taxation & Financing Business Assets

One of the most common requests each day from our business lease enquiries is for a factual summary of how the finance method may impact upon their business cash flow and tax. Naturally, the best person to discuss your tax needs with is your company accountant and taxation adviser, but the info we’ve prepared below ought to provide a handy starting point for that conversation.

Common ways to finance an asset acquisition:

  • Utilising surplus cash.
  • Purchase using business borrowings.
  • Commercial hire purchase.
  • Lease finance.
  • Novated lease.

Surplus cash:

  • Surplus cash is best suited to businesses repaying existing big cost business debt and when borrowing to acquire new assets at a lower rate.
  • In the situation of using the surplus cash to purchase, GST credits will be available on both accrual and cash basis and depreciation can be claimed on cost at a rate that writes off the costs of the asset over its life.

Purchase using existing business facilities (such as a commercial overdraft or mortgage credit line):

  • This finance option is best utilised when its interest rate are better than the other forms of finance yet the risk of tying up the funds must be weighed up.
  • Its benefits are that it can save time and eliminates the administration of another debt.
  • In opting for this finance, GST credits will generally be available when the asset is purchased under both the accrual or cash basis, depreciation is claimed on the purchase cost from purchase date over the asset’s life and the interest on the borrowings is tax-deductible.

Commercial hire purchase (CHP):

  • The benefits of this form of finance are its flexibility and benefits to small-to-medium sized businesses. Payments can be made either with an up-front payment or a ‘residual payment’ at the end of the term, with the balance payable in monthly installments.
  • At the end of the lease, the assets can be sold or traded once they have been purchased.
  • In the event of terminating early, there is a penalty interest charge.
  • A tax deduction is available for the monthly payments and depreciation can be claimed on the purchase cost over the life of the asset.
  • If the business is accounting for GST on the accrual basis an up-front GST credit is available while on the cash basis, it will be entitled to claim a GST credit equal to one- eleventh of the principal portion of the total payment made during the relevant period.

Lease finance:

  • Lease finance suits those assets that need regular upgrading.
  • The payments can be structured as either an upfront payment or a ‘residual payment’ at the end of the term, payable monthly.
  • Debt may be allowed to be kept ‘off-balance sheet’, which for some businesses it can be a major advantage.
  • At the end of the lease there is no specific right to acquire the assets, in terminating early a penalty interest is charged.
  • Tax deductions are available for the full amount of each monthly payment and GST is charged on the full amount of each lease payment.
  • Businesses will be entitled to claim a GST credit equal to one-eleventh of each lease payment during the relevant pay period.

Novated lease:yellowgoodsx264

  • This type of finance involves the financier, employer and employee.
  • The employer agrees to be responsible over the monthly lease payments or until the end of employment.
  • This type of loan suits the funding of company cars.

Tips:

In deciding which type of finance to choose the following are a few tips to consider when making the decision:

  • Take into consideration all the commercial issues.
  • Consider your future cash-flow needs.
  • Compare the costs involved with the different forms of finance question whether the purchase is really necessary.
  • Find out if you can afford to finance it.

Summary of finance Method & its impact on GST

Cash:

  • On purchase – full input tax credit.
  • Running costs – input tax credits.

Hire purchase:

  • Accrual basis – full input tax credit upon receipt of invoice or initial payment.
  • Cash basis – input tax credits on all payments.
  • Running costs – input tax credits.

Lease:

  • Accrual basis input tax credits claimed when each lease payment is due.
  • Cash basis – input tax credits claimed when each lease is paid.
  • Running costs – input tax credits.

Loan:

  • On purchase – full input tax credit.
  • Running costs – input tax credits.

If you would like to obtain finance for your business please click here for an obligation free quote or contact us on live chat. Alternatively, call us on 1300 558 887 to speak to a friendly Naritas team member.

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