Accounting, Taxation, Audit, Self Managed Super Funds, Goodwin Chivas & Co, Baulkham Hills, NSW, Australia
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August 2012 Newsletter-Buying an asset: what is the best way to finance it?
Buying an asset

Buying an asset

What is the best way to finance it?

There are several options available when financing an asset purchase. In this article we look at the following finance options:

Hire Purchase (HP)
Under this form of finance the financial institution owns the asset and only transfers ownership to you once the final payment is made. One of the benefits of a HP is that there is flexibility when setting the terms of the loan, including the duration of the loan, and the amount of the final balloon.

Lease
This is basically a rental agreement between yourself and the financial institution and is generally used when you do not intend to own the asset at the end of the lease term (however you may have the option to purchase the asset from the financial institution).

Equipment Loan/Chattel Mortgage
With this form of finance you are borrowing money to purchase an asset in the same way that you would borrow money to buy a property for example. The main difference with a chattel mortgage is that you are the owner of the asset, not the financial institution as with HP's and leases.

The table below summarises the key tax and GST implication of the above three forms of finance:

Hire Purchase Lease Equipment Finance/ Chattel Mortgage
Are payments deductible? * Only the interest portion. However a deduction is allowed for depreciation. Yes ** Only the interest portion. However a deduction is allowed for depreciation.
Can GST be claimed? * GST is claimed on the cost of the asset plus the finance charges. GST is claimed on the lease payment ** GST is claimed on the cost of the asset only.
When can GST be claimed? If the agreement is entered into after 1 July 2012, GST can be claimed up front regardless of the GST accounting method. *** The GST portion can be claimed when the actual lease installment is paid. Up front regardless of accounting method.

* The ability to claim tax deductions and GST is subject to the asset being used for an income producing purpose.
**Special rules apply for luxury cars to restrict the amount of GST and depreciation claimed.
*** If the agreement is entered into before 1 July 2012, the GST can only be claimed up front if you account for GST on the accruals basis

If you would like a comparative quote for finance, please contact Stuart Davey on 9899 8377.

If you have any questions please contact us.

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