ACCORDING to the author of a new book on taxation for small businesses, there are more ways to acquire a piece of equipment than simply fronting up the cash for a purchase.
Max Newnham, a partner in the accounting practice TaxBiz Australia and author of Tax for Small Business*, told Manufacturer’s Monthly, “Renting or leasing can make very good sense, especially given that the cost of a lease can be 100 per cent deductible against business income, if the equipment is used solely for business purposes. A credit can be claimed for the GST paid as well.”
The idea of leasing equipment is hardly new, but many of those who use leasing see it from a cash-flow perspective, or to help with a short-term problem.
“The tax angle can be overlooked if you don’t know about it – and the ATO doesn’t really go out of its way to tell businesses how they can lower their tax burden,” said Newnham.
Newnham notes that in most cases there is no need to keep complex records to claim the tax deduction for leasing expenses. In most cases, all that is required is the lease agreement, the payment schedule, and proof of payment.
The most common leasing options for equipment are an Operating Lease or a Finance Lease. At the end of a Finance Lease, the owner of the leased equipment offers the lessee the opportunity to purchase the equipment for a previously agreed lump sum payment.
One variation on the Operating Lease is a Fully Maintained Lease, where the lender can build the cost of maintenance into the rental payments.
Kirk Tsihlis, general manager of leasing firm LeaseChoice, shares the view that many companies fail to think about tax.
“What should be of greatest importance to business decision makers is the true after-tax cost,” he said. “There is a false economy in shopping around for the best rate, but then selecting the wrong funding product. It could be the equivalent of paying an extra 10 percent in rates.”
The choice of finance product will determine whether an asset is accounted ‘on balance sheet’ or ‘off balance sheet’. The flow-on impact of this choice determines whether payments are fully deductible (off balance sheet treatment) or only depreciation or interest can be claimed (on balance sheet treatment).
An operating lease will be treated off balance sheet, and an outright purchase, chattel mortgage or hire purchase will be treated on balance sheet.
Tsihlis notes that LeaseChoice has developed a simple analysis tool that can quantify and crystallise the total cash flows over a fixed period for leasing, buying or using hire purchase, which he sees as extremely useful for clients.
The analysis takes into account the impact of company taxation, depreciation, interest and inflation to provide a three-, four- or five-year cash flow snapshot of any decision.
Newnham agrees that taking a holistic view of leasing is essential, but also points to the operational advantages.
“Especially with equipment which is regularly superseded, leasing makes a great deal of sense,” he said. “The most common type of item leased, especially by smaller companies, is computers and phone systems, where the upgrades happen quickly and are obvious. There is no reason why the same thinking should not be applied to other types of equipment, from forklifts to processing equipment.
“But many companies rush into purchases without really thinking out the finance implications. They should look at how much the item will be used over its life, when it might become obsolete, and how much value it will add to the company,” said Newnham.
He said a good cost-benefit analysis will reveal whether leasing will be a better option than a purchase. Purchasing equipment that is not needed on an ongoing basis can lead to over-capitalisation and severe cash flow problems – and cash flow problems are a big killer of smaller businesses.
“The tax advantages of equipment leasing is something that any good accountant should be able to help with, but in many cases the opportunity for a deduction is missed simply because the head of the business does not think to raise it with their accountant, either before entering into the arrangement or even afterwards,” said Newnham.
“In some cases, business people are concerned that calling their accountant is going to cost them money. But this is being penny wise and pound foolish, in my view.
“A good accountant should be seen as a source of ongoing business advice, rather than just the person that does the tax return at the end of the year.
“Yes, you might pay for their advice, but if they help you on issues such as the deductibility of business equipment leasing it is very much worth it.”
Newnham also points out that the tax arrangements applying to leasing have proved to be fairly stable, and he does not anticipate any changes in either the legislation of the relevant case law.
* Tax for Small Business: A Survival Guide by Max Newnham, Wrightbooks.
TAXBIZ AUSTRALIA – 03 9756 7302.
LeaseChoice – 1800 220 226.