The following is the 3rd article on Equipment Finance in our weekly series
Prepayments
Continuing from last week’s look at finance structuring is the subject of prepayment of leases or other finance contracts. I’m often asked by clients if they can prepay a finance contract they have, especially when June rolls around and they are thinking of how to reduce their tax burden.
The short answer is “Yes”, you can prepay your finance contracts, but whether that prepayment can be claimed in the current financial year, or if it’s actually worth doing are two questions that require an individual assessment. The ATO still allows deductions for prepayment of Leases in certain circumstances. Prepaying an Asset Purchase contract or a Hire Purchase will almost certainly be accepted by the finance company, but it’s not going to give you any real benefit so you may be better using the money elsewhere.
Lets look at Asset Purchase first.
Asset Purchase
An asset purchase contract is sometimes called a Chattel Mortgage or Specific Security Agreement. It’s basically a loan to purchase an asset where you have ownership of the asset and the bank takes security over it. Can you prepay this contract? – Yes, the bank will be more than happy to take your money early. But given you can only claim the depreciation on the asset and the interest on the loan, the prepayment will not be something that you can claim on your tax. The other issue is that because they are usually a fixed payment structure, the prepayment will not save you anything over the term of the loan. Better look elsewhere to put your money.
Hire Purchase
Hire Purchase is very similar to the Asset Purchase in terms of what you can claim, so the same applies, however there may be some difference on the GST treatment if you are on simplified tax system. It should be noted that if you are on STS, then it would be unlikely that you would have a Hire Purchase given the GST issues around this. (*please call me to discuss if this applies you)
Lease
When it comes to a Lease, there are certain circumstances that a prepayment can be claimed as a deduction. There were some major changes to this prepayment rule way back in 2000 and many people thought it had been ruled out altogether, but if you are on a cash accounting system (usually under $2m annual turnover), you are still potentially able to claim up to 12 months of prepayments. Again this will not actually save you money on the Lease contract as it is a fixed payment/fixed term contract, but you will gain the benefit of a higher tax deduction and this is sometimes a very effective use of excess cash at the end of the tax year.
This is very general advice and you should always discuss your taxation planning with your accountant. As always if you have a specific question about this article or any aspect of equipment finance, please send me an email or give me a call. 0403 439 502.