The most common types of Equipment finance products to suit your needs are:
A Chattel Mortgage allows a client to purchase Equipment and obtain immediate ownership. The client assigns title of the equipment to the lender under an agreement where the client pays a fixed, periodic rental payment or instalment for the term of the contract.
A Chattel mortgage is designed especially for those who account for their business operations on a "cash basis".
Business customers accounting on a "cash basis" who enter into a Chattel Mortgage contract can claim back GST as soon as they lodge their next Business Activity Statement
Possession of the asset remains with the client and once the term of the contract is complete or "paid out" the lender releases its interest in the asset and assigns the title back to the client.
The purpose or use of this equipment must be wholly or predominantly (greater than 50%) for business purposes.
The client is responsible for all running, maintenance and insurance costs during the term of the agreement.
The Chattel Mortgage is registered with ASIC (in the case of incorporated entities). There is a stamp duty cost for company borrowers in NSW which is calculated at approx $4.00 in the thousand borrowed (some exemptions do apply for Farming related purchases). As from 2012 there will be a new Register known as PPSR
(please refer to www.ppsr.gov.au)
Similar to other types of Equipment finance, the Purchaser may structure their loan to suit their cash flow/budget with the terms from 2 to 5 years, equal monthly instalments (in advance or arrears) and they may choose to have a Balloon payment at the end.
Commercial Hire Purchase
The Commercial Hire Purchase (CHP) is also known as Term Purchase.
Changes to Federal legislation amended CHP agreements to be a fully taxable supply. For these agreements, the supply of credit is now taxable instead of input taxed.
Previously, GST was only payable on the purchase price of the Asset being financed. But from 1 July 2012 GST is payable on the purchase price of the asset plus all term charges (interest) and fees.
As of 1 July, 2012, businesses using Cash accounting and financing assets by way of a CHP agreement, can claim GST charged on the purchase price of the asset financed plus GST on the interest in exactly the same way they do using the Accruals accounting method: up-front, when they lodge their next BAS. As hirers will be able to claim the GST on the interest upfront, it will provide an immediate cash flow benefit. It will exceed the cash flow benefit of Chattel Mortgages given that the GST credit is higher for Commercial hire purchase agreements, because the GST applies to the credit as well as the asset.
Early payout or variation to a CHP agreement will also involve a GST adjustment.
Under a CHP agreement the borrower purchases the equipment over time by making a series of scheduled monthly repayments. On payment of the final instalment the ownership of the equipment automatically passes to the borrower.
Similar to other types of equipment finance the purchaser may structure their loan to suit their cash flow/budget with terms from 2 to 5 years, equal monthly installments (in advance or arrears) and they may choose to have a Balloon payment at the end.
Unlike the Chattel Mortgage there is no stamp duty payable on the CHP contract.
Leasing has been the generic term for financing Equipment for decades but in fact leasing is actually a type of finance contract.
Since the commencement of GST Commercial Hire Purchase and Chattel Mortgage finance has been preferred to Leasing.
The main factor in leasing is that the Lender is deemed to own the Equipment until such time as the Borrower makes a "residual" payment at the end of the contract.
Some features of leasing are:-
The borrower does not finance the GST. The GST is in the hands of the lender
Monthly repayments attract further 10% GST
The full monthly repayment is tax deductible although the Lease is an "off balance sheet" item
An upfront deposit is not allowed with a Lease (although the borrower may make a bulk first instalment)
Leases must have a residual
Similar to other types of Equipment finance the Purchaser may structure their loan to suit their cash flow/budget with terms from 2 to 5 years, equal monthly instalments (mainly in advance) with a residual payment at the end.
A Novated Lease is particularly designed for the salary packaged individual who is supplied a Motor Vehicle option as part of the package.
A Novated Leas works as follows:
The employee decides what type of vehicle they want, and then enters into a finance lease. The employee, employer and the lender sign a "Novation Agreement" whereby the employer agrees to take on the obligations of the employee under the lease. Under this arrangement , the employer makes the monthly lease payments on behalf of the employee. Should the employee leave his or her employment for any reason, the 'Novation Agreement' ceases and the obligations assumed by the employer revert back to the employee.
A Novated Lease provides flexibility for everyone. For employees it means greater choice in the vehicle they drive. As the finance lease in in their name, they have effective control of the vehicle, and can realise any equity built up in the vehicle over the duration of the lease. The lease is portable, as should an employee move to another job, they take the vehicle and lease with them. They enter another 'Novation Agreement' with the new employer and the lender, and maintain the benefits of their Novated Lease.
A Novated Lease can also be tax effective, as all vehicle running costs are paid form the employees pre-tax income
A Novated Lease ensures that the motor vehicle is deemed to be 'held' by the employer for FBT purposes, while the vehicle is perceived to be 'owned' by the employee. Lease payments do not represent income.