Jenneth Orantia
Smarter Writer

Jenneth Orantia is a journalist who has been reporting on tech developments and trends for the last decade

To buy or lease business equipment: That is the question

Jenneth Orantia
Smarter Writer

Jenneth Orantia is a journalist who has been reporting on tech developments and trends for the last decade

Smarter assess the pros and cons of leasing, hire purchase agreements and chattel mortgages, so you can work out which option is most beneficial to your bottom line.

When you’re starting up a business, you’ll have to decide whether to buy your office equipment or use one of several finance options such as leasing, a hire purchase agreement or a chattel mortgage (which is a mortgage on a movable item of property). Your equipment needs could be as basic as a single laptop and internet connection; alternatively, it could have dozens of items such as printers, servers and any specialised machinery.

There are pros and cons to buying or financing your equipment that apply in a general sense, as well as advantages to either approach that are valid in specific circumstances.

The following advice is general only. Before making any purchasing decisions, you should consult an accountant to ensure you use the method that best suits your individual business needs.

Piggy bank on keyboard

Buy or lease?

For many small businesses, buying high-value items like cars or a fleet of computers outright – or getting a bank loan to allow purchase – may not be financially feasible from the beginning. This is where leasing the equipment, or acquiring it under a hire/purchase or chattel mortgage, becomes attractive.

When you finance an item, you don’t have to pay any money up-front, which frees up cash that can be used to grow the business. The main difference between leasing and hire purchase agreements or chattel mortgages is that you don’t own the equipment if you choose to lease.

If you choose not to buy – whichever finance method you select – it can be an attractive option over purchasing equipment outright because you can spread the cost out over predictable monthly payments that you can budget for ahead of time. The downside of financing versus buying equipment outright is that it ultimately costs more over the lifetime of the agreement.

When is it better to finance equipment?

As a general rule, if the equipment you need is likely to be outdated within three years, you may be better off financing it.

Whether a lease, hire purchase agreement or chattel mortgage is better for your needs will depend on the type of equipment you need and your cash flow. For equipment that loses its value quickly, for instance, you may be better off leasing, so you are able to upgrade the equipment to newer, faster, and possibly cheaper models at the end of the lease period.

So long as the equipment is solely used for business, you can claim the full amount of the monthly lease payments against your business’ income (in other words, you can ‘write it off’). If it’s not used 100 per cent for business, you can only claim a percentage of the lease payment.

If you don’t have any dedicated IT support staff, leasing – or even renting – can be a good arrangement for technology equipment like computers, printers, photocopiers and servers, as you can choose a company that includes service, maintenance and repairs with the agreement.

If maximising cash flow is your overriding priority, you should consider going with a hire purchase or chattel mortgage agreement, as you’ll be able to claim a GST credit for the entire agreement amount in the first tax year. Generally speaking, chattel mortgages are better for businesses that are registered for GST on a cash basis, while hire purchase agreements are better for businesses that are registered for GST on an accruals basis.

When is it better to buy?

If you’re planning on using the equipment for more than three years and it holds its value well, you may want to consider purchasing. Again, this is not a hard and fast rule, and depending on the value of the item, you may be able to claim more tax deductions if you purchase the item through a finance arrangement.

If you’re a small business (defined as a entity that is an individual, partnership, trust or company with an aggregated turnover less than two million dollars), you can take advantage of the simplified depreciation rules, which lets you write-off any assets purchased from 1 January 2014 in full that cost less than $1000 in that financial year. There are other benefits under the new simplified depreciation rules that can be found here.

The general rule for tax breaks when it comes to buying business equipment outright is that you can ‘write off’ items (that is, claim the full amount as a tax deduction) that cost $300 or less.

The ATO has a calculator on its website that you can use to calculate how much you can deduct per year using either method, as well as compare yearly deductions between the methods.

For equipment that costs more than $300, you have to claim the value of the asset over its effective life using either the prime cost or diminishing value depreciation methods (although see below for rules specific to small businesses).

Both methods end up getting you the same amount at the end of the day, although you may prefer the diminishing value method because it gets you a higher tax deduction in the first few years – which are typically the most cash-strapped times for small businesses.

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