When considering purchasing equipment there are different financing options you can consider, these options have a range of different tax outcomes.
Leasing allows you to have the use of the equipment while making regular payments to the lessor (the owner of the asset).
Under a leasing agreement you do not own the equipment but can have the option to purchase it at the end of the lease (usually for a markedly reduced cost).
Leasing payments (which will incorporate financing costs) are deductible over the life of the lease (and the payment and therefore deduction is generally consistent each year).
GST credits can be claimed on each payment (if registered).
When financing equipment using a chattel mortgage, you own the asset upon purchase.
A chattel mortgage will entitle you to claim depreciation on the equipment based on the effective life of the asset and your method of depreciation (deduction will generally be higher in the earlier years if using a pool or diminishing value). GST can be claimed upfront when the equipment is purchased (if registered).
Each repayment includes a principal and interest component, although it is not generally separated. The interest component will be deductible when paid. The principal of each repayment will reduce the value of your debt.
The key factors to consider in deciding which financing option is most suitable for you are:
- Timing of deductions – you may have the opportunity for accelerated depreciation if you choose to lease short term, (although this may have cash flow implications)
- Legal ownership/title – do you want to own the equipment
- Finance establishment costs and inherent interest rates associated with both a chattel mortgage a chattel mortgage and lease
If purchasing equipment it would be beneficial to discuss the various financing options available to you with your business advisor, to ensure you are choosing the option that will suit your situation.