Equipment Finance

How does a commercial hire purchase compared to an equipment loan?

A commercial hire purchase is a lease facility where your business leases the equipment from the lease provider (lessor) and then has the option to purchase the equipment at the end of the term at its fair market value.

The repayments are made up of principal and interest such that the equipment is paid down to its fair market value and the final repayment would represent exercising the purchase option.

This facility is similar to an equipment loan where a balloon payment would be equivalent to the fair market value purchase option. However with a commercial hire purchase the ownership of the equipment is at the granted end of the loan term rather than the start.

What are the tax implications of each type of equipment finance?

The tax implications depend on who holds ownership at the time of purchase and any intentions to take ownership at the end of the term.
For an equipment loan, as your business holds ownership at the start, the tax implications are:

• Equipment is part of your assets
• Loan facility is part of your liabilities
• Deductions can be made for interest and depreciation
• Input tax credit for GST on the purchase price

Similarly for a commercial hire purchase and Finance Lease there is an intention to own the equipment at the end of term, you can still deduct interest and depreciation as well as claim the GST as an input tax credit.

Note for commercial hire purchase agreements entered into after 1 July 2012 the whole hire purchase repayment, including the principal component is subject to GST.

This means for a chattel mortgage and commercial hire purchase of the same amount, the commercial hire purchase would have higher repayments.

This can be a quick deciding factor between an equipment loan or commercial hire purchase. It is important to check with your Accountant so you can decide based on the overall benefits and costs.

For an Operating Lease Lease there is no ownership or set intention to own the equipment so the whole repayment can be tax deducted but no depreciation. GST is applicable to the whole repayment and it can be claimed as an input tax credit. Similarly for an operating lease there is definitely no intention to own the equipment so the same tax implications apply.

There are so many implications with each of these facilities and different ways they may apply. We have summarised them in a matrix below to make the comparison easier. We always recommend an introduction to your accountant, so we can work together to provide recommendations backed up by professional tax advice.

Do I need to put a deposit?

Generally a deposit is only mandatory if one or more of the below apply:

• If you are not a homeowner
• Your business has been in operation for less than 12 months
• You have never had credit before
• You have bad credit history

What supporting documents do I need to provide?

All lenders will require:

• Certified Driver license OR Passport and Medicare card
• Rates notice for property / properties owned
• Statement of Assets & Liabilities

Then there are three classes of income verification you can provide:
Full documentation involves:

• Last 2 Years Company / Trust Tax Returns & Financial Reports
• Last 2 Years Individual Tax Returns & Notice of Assessments
• Last 12 months ATO Integrated Client Account and Integrated Tax Account

Semi low documentation:

• Latest BAS statement
• Last 12 months ATO Integrated Client Account and Integrated Tax Account

Low documentation:

• Self or accountant certified income
• Or affordability statement

Please note this list is client dependent and will be tailored to your unique scenario.

How long does the process take?

Due to the varying degree of documents to analyse, timeframes from when all required documents are received to approval are:

• Full documentation – 2 to 5 days to approval
• Semi low documentation – 1 to 3 days
• Low documentation – 1 to 2 days

We encourage you to get in touch with us as early as possible. We have the in-house expertise to give you an accurate view of what the outcome would be, without even needing to apply (or marking your credit file).

How much will it cost?

This really depends on how specialised the equipment is and the level of income verification provided. The more specialised it is the less lenders are available which means the rates can be higher. On the flip side, the less specialised it is and the more income verification that is provided, the more lenders there are and the lower the rates can be, starting from 5% to 8% and going up to 15 – 18%.

Other costs on average would be:

• Lender establishment fee $350 – $450
• PPSR fee – $10
• Monthly admin fee – $5

As there can be significant analysis, enquiry and negotiation involved our fees do vary but we will let you know before beginning work what the maximum would be. The fees can be added to the loan so they are not an out of pocket expense.