Equipment financing is available exclusively for business owners, and is designed to assist in the purchase of essential equipment for their business. This can include machinery, furniture, computers, and almost any other sizeable business purchase.
Motor vehicle financing is even a form of business equipment financing.
More so than
motor vehicle financing, equipment financing is extremely subjective, and applications are usually assessed on a case-by-case basis by the financier. The industry in which the business operates, the type of equipment, the age of the equipment, and many other variables are assessed in determining the terms (and viability) of equipment financing.
As with
motor vehicle financing, equipment can be financed through a number of different loan types:
For a chattel mortgage, you the customer purchase
the equipment in your own name (or business name). The lender then
registers a mortgage against the equipment and lends you the necessary
money to purchase it. Because this requires a formal mortgage
registration process, chattel mortgages often involve a higher initial
cost than the other loan types. Chattel mortgages also allow you to
nominate a "balloon" payment, which allows you to avoid paying the loan
off in its entirety during the loan term, and instead pay it down to a
"balloon" amount. At the end of the loan term you can then elect to pay
that amount off in full, or refinance the outstanding balance again.
If you purchase the equipment through an entity that is registered
for Goods and Services Tax (GST), then you can usually claim the GST
paid on the equipment purchase in your next Business Activity Statement.
The ongoing repayments of a chattel mortgage are not tax deductible in
their entirety. Only the interest portion of your repayments and the
relevant depreciation on the equipment are tax deductible.
The fundamental difference between a hire purchase and a chattel mortgage
is the ownership of the equipment. With a hire purchase, the financier
purchases the equipment, and you the customer hire it from the financier.
Because this doesn't involve registering a mortgage against the equipment like with a chattel mortgage, the upfront fees for this type of financing tend to be lower. As with a chattel mortgage though, you still have the ability to nominate a balloon payment that corresponds appropriately with your loan term.
Goods and Services Tax (GST) on a hire purchase is only
claimable by you if you are registered for GST on an accrual basis from
an accounting perspective. Please clarify this with your accountant if
you are unsure. The ongoing repayments for a hire purchase are treated
the same as with a chattel mortgage from a tax point of view. You can
claim only the interest portion, and the relevant depreciation of the equipment's value.
As with a hire purchase,
a lease means that the financier purchases the equipment and rents
it back to the customer for a fixed monthly charge. Leases usually come
with a compulsory "residual" payment. This "residual" is like the
"balloon" for a chattel mortgage or a hire purchase, and requires that you have a certain residual amount owing on your lease at the end of your lease's term.
Goods and Services Tax (GST) on a lease is claimed upfront by
the financier, since they are the owner of the equipment. The amount
financed therefore usually excludes the GST amount, meaning that the
loan amount and consequently base repayments on a lease are a little
lower. GST is then added to each monthly repayment, however, bringing
the total repayment roughly in line with the other loan types. The
ongoing repayments on a lease are generally fully tax deductible.
Please
contact us if you would like more information or are unsure whether equipment financing will suit your circumstances.