PLANTING THE SEEDS OF FINANCIAL GROWTH
If the prospect of a good wheat cheque this year means you can start thinking about acquiring new equipment (or a new vehicle) that has been out of your reach over the past few years, you would be wise to do your homework on the kind of finance that will serve you best leasing or commercial hire purchase.
One is not automatically better than the other. For some, leasing is a more financially sensible - and tax effective - way to go, and for others the reverse is the case. It depends on your circumstances.
A finance company consultant (or sales agent) may recommend one option over the other, but you need to be aware that their recommendation may be based on instructions to push a particular product, rather than what is best for your circumstances.
A good finance consultant will suggest that you check with your accountant for advice on the tax implications before committing to a finance agreement.
These are the basic differences between leasing and commercial hire purchase. With a lease, you are renting the equipment for a fixed period of time, (say four years) at the end of which the equipment will have a residual value based on depreciation guidelines set by the Tax Office. The lease rentals are tax deductible (provided the equipment is used to earn assessable income).
At the end of the lease period, you can either make an offer to the finance company to purchase the equipment at the originally agreed residual (but under existing tax laws the lease agreement cannot provide you with an absolute right to buy the equipment) or you can return the equipment to the finance company, which will sell it in the market place.
Should the price be less than the agreed residual value, then it will be your responsibility to make up the shortfall. In some instances a finance company may agree to re-finance the equipment for an agreed additional period.
With a commercial hire purchase, a program of repayments is set, at the end of which you become the owner of the equipment. From the outset, you can claim a tax deduction for the depreciation of the equipment and a further tax deduction for the interest component of the repayments.