Leasing & Hire Purchase

Ever wondered how you would fund the purchase of a new asset and the choices you have available for doing so. Below we uncover some of the myths and benefits of the different ways this can be achieved. Which method you choose comes down to deciding if the asset is going to be for private or work purposes?

Equity Funding

Purpose: Available for all clients who have available equity in their facility in order to purchase the asset from available funds or by making a small variation to their facility in order to access equity in their property to facilitate such a purpose. A decision needs to be made to split your facility if the asset is to be used for work or business purposes in order to easily calculate your repayment amount and the tax deductibility of the interest paid.

How it works: A separate sub account can be established to make the purchase. This account should ideally be set up over a 3 to 5 year period so that it is fully paid off within a reasonable time period. Please also allow for the fact that most lenders will only allow for a split of $25000 or more.

Benefits:

• You own the asset as soon as you purchase it.
• Direct debits for the agreed amount each month can be automatically organised.

Commercial Hire Purchase

Purpose: Available for companies, business, sole traders and professionals who use their assets for business purposes. Under this method, the GST component of the purchase price of the asset can be claimed back by the purchaser on the next Business Activity Statement rather than claiming the GST over the term of the contract.

How it works: The hire purchase agreement is a contract where the financier (the 'owner') gives the 'hirer' possession and use of the asset in return for regular payments. When the final payment is made, the hirer owns the asset.

Benefits:

• You can claim a tax deduction for the depreciation of the asset as well as the interest component of the loan repayments where the asset is used for business related purposes.
• Fixed repayments over the life of the loan, loan terms of 9 to 60 months as well as structuring repayments with or without a balloon payment at the end of the loan so that you can tailor repayments to suit your lifestyle and cash flow.

Chattel Mortgage

Purpose: Available for sole proprietors, partnerships and companies that use the 'cash' method of accounting for the Goods and Services Tax (GST). Under the cash method, the GST component of the acquisition price of the asset can be claimed back on the next Business Activity Statement, rather than claiming the GST over the term of the finance contract.

How it works: You take ownership of the goods upon delivery and Financier secures the loan by registering a charge over the goods.

Benefits:

• Flexibility is an attractive feature of a chattel mortgage. You can choose to finance the total purchase price, or use a deposit or trade-in to reduce the loan repayments.
• You become owner of the asset while the financier secures a charge over the asset.
• As you are the owner of the asset you may claim a tax deduction for the depreciation on the asset as well as the interest component of the loan repayments. And GST is not payable on the loan repayments.
• Fixed repayments over the life of the loan, loan terms of 9 to 60 months as well as structuring repayments with or without a balloon payment at the end of the loan so that you can tailor repayments to suit your lifestyle and cash flow.

Consumer Loan

Purpose: Available for individuals to purchase an asset where there is no business use of the asset and it does not form part of any salary packaging arrangement.

How it works: The asset is the security against the funds borrowed to acquire the asset. As the financier holds the asset as security, their risk of loss is reduced, and as such a much more competitive interest rate can be offered than for standard personal loans.

Benefits:

• Repayments are fixed for the period of the loan. In general, the interest rate on a personal asset loan is significantly less than standard personal loans. You can finance the total purchase price of the asset.

Finance Lease

Purpose: Available for sole proprietors, partnerships and companies that use the 'cash' method of accounting for the Goods and Services Tax (GST).

How it works: The asset is financed excluding the GST component of the acquisition price of the asset that is claimed back by the financier. This means you are financing the ex GST price, reducing the amount borrowed, however GST is then charged on your monthly payments which can be claimed back on the entity's next Business Activity Statement over the term of the finance contract. During the term of the lease agreement the lessee pays the rental and does not obtain ownership or equity in the asset. The lessor retains ownership of the asset, while the lessee assumes the risk of the residual value.

At the end of the lease the lessee has the option of returning the asset to the lessor (and make up any shortfall in the residual that may occur), pay out the residual and obtain ownership of the asset or refinance the residual for another lease term. Under a finance lease, the lessee is responsible for all maintenance and running costs of the asset. Finance lease rentals are subject to GST, as is the residual value of the asset.

Benefits:

• A finance lease allows the lessee to select a lease term and repayments to suit their cash flow.
• Lease rentals and residual values can be negotiated within an appropriate range to allow more flexibility in budgeting.
• Where the asset is used for business purposes, the lease rental will be tax deductible.
• There is no initial outlay required from the lessee as finance is for 100% of the value of the asset.
• The asset does not appear on the lessee's balance sheet.
• The term of the loan ranges from 12 months to 60 months.