Motor Vehicle and Business Equipment Finance

Phone: (02) 9890-9799 Fax: (02) 9890-9431
Email: adrian@aldersfinance.com.au

Operating Leases (Rental)

A "rental" or "rental agreement" is the same thing as an operating lease. Both terms mean the same thing. Most businesses rent some form of equipment and this equipment is required to operate their business. For most businesses rental is the ideal way to finance motor vehicles, plant & office equipment as the instalments are generally tax deductible (if used for business purpose) and the flexibility to change equipment and keep up to date is of paramount importance.

There are many reasons why a business wants to finance equipment, but to conserve cash reserves for other activities and to be tax effective in their decision making are the main objectives.

Rental of Motor Vehicles

Rental of motor vehicles has become increasingly popular in recent years. As motor cars currently now have a tax life of 8 years – ATO guidelines (see our section on finance leases and setting of residual values) more and more businesses are looking at rentals to keep their fleet up to date and very few businesses keep their vehicles for 8 years. The problem now with finance leases for motor cars is that the residual value set at the end of the agreement is often higher than what the vehicle is worth and hire purchase agreements yield smaller tax deductions.

Why rent a business-use Motor Vehicle?

Rental payments are tax deductible when the vehicle is used for business purpose. * For example if the vehicle is used 90% for business then the payments should be 90% tax deductible
The shorter the rental term the higher the tax deductions
Rental helps avoid being "upside down" at the end of the term (when your payout is higher than what the vehicle is worth)
When you change your vehicle you will probably receive our loyalty upgrade discount (if you've made your payments on time and looked after the vehicle)
By renting the vehicle, salary-sacrifice options may be available through your employer (car payments are made from your salary before tax has been taken out)

How does hire purchase compare?

Tax deductions are smaller as it takes 8 years to write off (depreciate) the car. Depreciation is tax deductible *
You can generally only claim up to $57,180 of depreciation in total over the 8 years, even if the car costs more than this. That's a maximum of only $7,147.50 per annum (12.5% Prime Cost)
Payments made under a hire purchase agreement are NOT the tax deductions. Your payment is made up of principal and interest. Only the interest portion is tax deductible *
Hire purchase agreements can't be novated. Rentals can be.

* "to the extent that the vehicle is used for business purpose"

Rental of equipment and machinery

Rental agreements are the most popular way to finance business equipment
Rentals are flexible – you can add extra phone handsets, computers, photocopiers, etc to an existing agreement and simply vary the payments. This is not possible with a finance lease or hire purchase
Rentals are an operating expense and do not appear on a balance sheet in your accounts
Rentals are a tax-effective way of financing assets with a long tax life
You have no liability to buy the equipment at the end of the agreement and this avoids being stuck with old equipment
IT equipment changes rapidly. Rentals of computers and IT equipment are popular as upgrading every few years is often required to keep up with technological advancements
Rentals are calculated on the GST exclusive price of the equipment. GST is levied on the instalments. Most businesses claim this GST back as an input tax credit (provided they are registered for GST and are entitled to claim)
Equipment is often upgraded at the end of the rental but you can negotiate a further rental if the equipment has some life left in it
Rentals are fixed for the term of the agreement so you know with certainty what your commitment is
Rentals avoid any residual risk in the equipment. The risk of obsolescence is transferred to the finance company