This article is sponsored by LendingPro.
As a business owner, it makes sense that keeping income producing assets up-to-date is key to your efficiency and driving revenue. As technology develops, so too does the need for your business to regularly reassess revenue-generating assets in order to remain competitive.
Regularly upgrading equipment means continual investment. It means locking down working capital in purchased assets which may become obsolete, hard to sell or costly to dispose of. Furthermore, it freezes cash that could be otherwise used to maximise EOFY deal and tax-time savings, such as reducing your taxable income by pre-paying insurances or interest payments for the next financial year.
Fortunately, there are asset financing options to help you both increase productivity and free up cash, whilst taking advantage of tax benefits before June 30, 2018.
Anna and Jason’s business
Anna and her business partner Jason, both dentists, own a dental surgery. They are looking to upgrade their X-ray system but are hesitant to buy it outright as their last system was outdated quickly. They also don’t want to freeze their limited working capital, so Anna and Jason opt for a finance lease to fund the X-ray system. This way, they can claim the lease rental as a tax deduction and trade-in the system at the end of the lease for the newest technology. They can also use their now available cash to prepay insurances and interest payments on other loans to reduce their taxable income for this financial year.
There are a number of approaches that, like Anna, you can take in financing equipment or vehicles before the end of financial year, each with their own advantages and tax-time benefits.
A finance lease means that the lender will purchase the equipment on your behalf. You will then pay the lease in instalments over a period of time. At the end of the lease you have the option of purchasing the asset (for a residual amount agreed at the beginning of the lease), trading in the asset for new equipment or simply ending the lease. If you look to purchase at the end of the lease, there is a risk that the asset will be worth less than the residual value.
Tax-time benefits of a finance lease:
Generally, you can claim the lease rental as a tax deduction. The lender pays the GST component, making your repayments lower.
An operating lease is best for equipment that becomes outdated quickly. Jonathan Raymond, Director of LendingPro, advises, ‘An operating lease is ideal for equipment that needs regular replacement and reduces the risk that you will end up owning obsolete technology. At the end of the lease period, you simply return the goods to the lender. Unlike a finance lease, the risk of the market value being less than the residual value lies entirely on the lender.’
Tax-time benefits of an operating lease:
Claim the full lease payments as a tax deduction, meaning you could pre-pay a portion of your lease before June 30, 2018 to minimise you taxable income. Like finance leasing, your repayments will be lower as the lender pays the GST component.
Equipment and Vehicle Loans
Otherwise known as a Chattel Mortgage (a “chattel” is a moveable asset). An equipment or vehicle loan means the lender provides you the finance to purchase the asset which you will then own. The asset also acts as security for the loan, meaning there is less documentation and often no down payment required.
Tax-time benefits of equipment and vehicle loans:
Claim the interest payments on the life of the loan. Instantly write the asset off with the Instant Asset Write-Off Scheme for assets under $20k. There is no limit to how many times you can claim. For assets over $20k, claim depreciation on the equipment in your business.
As you approach the end of financial year, do an assessment of equipment necessary to create revenue for your business. Is it already, outdated by new models or technology? Are there new more efficient tools? What are your competitors using?
By utilising asset finance you are not limited by available cash in your business, so you can have an agile response to developing technologies for a competitive offering. LendingPro can help you determine what sort of asset finance can work for you. Visit lendingpro.com.au or call 1300 998 555 to speak to a specialist loan advisor.
The information in this article is of a generalised nature, it is important that you obtain individual financial and tax advice for your own small business.
This article is sponsored by LendingPro.