Opening the doors for business is never easy.
On top of other costs such as purchasing stock, arranging insurance, paying staff and allocating funds to pay rent (if you don’t own the building), there are also costs involved in acquiring, upgrading or replacing fitouts.
So, what is the best way....
by Zhongwei Chen, knp Solutions Pty Ltd
There are different ways to finance office fit-outs and it is often difficult to decide which kind of finance to use.
The type of finance chosen can affect:
- when the legal ownership of the asset changes hands
(e.g. when do you become the owner);and
- the amount and type of tax concessions available
(e.g. who can claim the depreciation or monthly
payment as a tax deduction).
1. Hire Purchase
During this time, the client may use the asset but is not the owner of the asset. The title to the asset only passes once the goods have been paid for.
Amount financed is the GST inclusive amount of the fit-outs.
1.1 What happens at the end of the hire purchase?
At the end of the hire purchase agreement, the client becomes the owner of the asset when it makes the final payment.
1.2 Income tax treatment
The client may claim tax deductions for:
- interest paid on the loanThe client may not claim the monthly instalment payments as a tax deduction.
1.3 GST treatment
For hire purchase agreements entered into on or after 1 July 2012, the GST registered client can claim an input tax credit upfront (for the price of the asset) regardless of whether they use the cash or accruals basis of accounting for GST.
2. Chattel Mortgage
Unlike a hire purchase agreement, the client will immediately become the legal owner of the asset.
Amount financed is the GST inclusive amount of the assets.
2.1 What happens at the end of the chattel mortgage?
Once the final payment has been made, the security interest over the asset is removed.
2.2 GST treatment
GST is charged on the purchase price of the asset but not on the monthly rental or the residual payment.
The GST registered client can claim input tax credits upfront for GST paid on acquiring the asset as soon as they lodge their BAS (and not progressively over the term of the loan).
2.3 Income tax treatment
As with a hire purchase, the client may claim depreciation and interest paid as tax deductible expenses from the start of the chattel mortgage.
3. Operating lease
The client may use the asset for the duration of the agreement in exchange for payment of a fixed monthly lease rental for the term of the lease – but ownership of the asset remains with the financier/lessor.
Unlike hire purchase agreements and chattel mortgages, the amount financed under the lease is the GST exclusive price of the asset – resulting in lower monthly payments for the client.
3.1 What happens at the end of the operating lease?
At the end of the lease, the client can either:
- pay the residual value (final instalment) of the asset and become the owner;
- trade it in;or
- refinance the residual and continue the lease.
3.2 GST treatment
GST is charged on the monthly lease rental and the residual value at the end of the lease.
A GST registered client can claim back GST input tax credits contained in:
- the monthly lease rental (claim in each monthly or quarterly BAS over the life of lease term);and
- the residual value.
3.3 Income tax treatment
Lease payments (less GST input tax credits) are tax deductible. A tax deduction can also be claimed for lease payments made in advance.
Up to 30 June 2017, small business can immediately write off (claim the full value of) depreciating assets that cost less than $20,000 each, as long as those assets are purchased and installed ready for use between 7.30pm (AEST) on 12 May 2015 and 30 June 2017. These simplified depreciation rules work well with hire purchases and chattel mortgages.
Written by Zhongwei Chen, knp Solutions Pty Ltd