When it comes to the types of finance
for your practice, there are many ways in which loans can be structured. Three of the most common types of loans which are available for the finance of your equipment or fit-out are a lease, hire purchase or chattel mortgage. In looking at these facilities, I’ll be
making comments in relation to the tax deductibility of these payments in
these types of finance, as well as, their impact for GST. There are a lot of issues
that you need to consider before choosing the type of finance package
that is right for you. So, this should only be done after full consideration of
your personal circumstances. A lease arrangement is essentially a hire
agreement. You’re treated as hiring the equipment under the lease, as such, the
payments will have a GST component and you will be able to claim the GST
component back in your business activity statement, as you make these payments. For
example, if you’re making a lease payment of $550 within
that $550 there would be a $50 component of GST and you
would be able to claim this GST back in your business activity statement.
After allowing for the $50 GST credit your net outlay is $500.
The full $500 can be claimed as a tax deduction. Leases are
commonly used in relation to fit-out of premises as they tend to provide a
better taxation outcome than a depreciation would. However, you should
seek advice in relation to your personal circumstances before making a selection. Under a hire purchase agreement the
actual ownership of the asset rests with the financier and it transfers to you
over a period of time as you make the payments under the hire purchase
agreement. Under a hire purchase arrangement the actual ownership of the
asset rests with the lender but slowly transitions to you over a period of time.
As such, instead of leasing the equipment your actually paying off the
loan in relation to that equipment. Like say a home loan there’s both a principal
and interest component to every payment you make and it’s only the interest
component of those payments that you are able to claim a tax deduction on.
However, because you own the equipment instead of being able to claim a
deduction for the payment, you claim a deduction from the depreciation on that
equipment. The rates of this depreciation will vary depending on your own
circumstances and the effective useful life for the assets. Because a lot of
practices are considered to be small businesses they may be able to access
concessions in relation to depreciation under the small business taxation rules. This
can lead to a higher depreciation claim available to you. In relation to GST on
your hire purchase where the asset is being purchased you’re able to claim
back a full amount of the GST in your business activity statement at the time
of the purchase. Again before choosing a hire purchase type finance you should
seek advice to make sure that this works for your own personal circumstances. Essentially a chattel mortgage is
treated almost identically to a hire purchase when it comes to taxation. Like
under a hire purchase you will be able to claim a tax deduction for the
interest component of the payments you make on the finance, as well as, the
depreciation on the equipment that you’ve purchased. In relation to GST, you
should be able to claim the GST back at the time of the purchase of the asset. The
only difference really comes from a legal perspective where under a hire
purchase you’re deemed to have aquired the asset in increments over time as you
make the payments, whereas under a chattel mortgage you’re deemed to have
purchased an asset fully at the time of acquisition. There can be opportunities
in structuring the finance to provide yourself with an improved outcome for
tax purposes. If you have any questions please contact your William Buck advisor