As the new financial year gets underway, it’s opportune for businesses to review their finance options in light of current taxation measures. While a cheap interest rate is integral to cost-effective business finance, tax deductions can represent a real saving. Deductions reduce taxable income which lowers the amount of tax payable in that financial period.
All forms of business finance have tax deductible elements. But the amount of the deduction and the timing in when that benefit may be realised, varies with different finance products. Deductions are subject to rulings as made by the ATO. In addition to the standard tax rulings, the Federal Government can introduce special measures, often with a timeframe, to support and assist business.
Such was the situation in April 2020 when the Federal Government introduced Instant Asset Write-off as a tax measure for eligible businesses and assets as part of the COVID-19 stimulus package. This measure was amended several times later in 2020 to temporary full expensing.
Taking advantage of the current taxation measures available to a business through financing can result in significant benefits in real terms. Optimising tax benefits available with business finance products can maximise deductions and allow the business to realise savings on tax payable for 2022/23.
For businesses considering investments in assets such as cars, trucks, other vehicles, plant, machinery and equipment, selection of the finance product should take into account consideration of the tax benefits available.
Asset Acquisition Finance –Tax Deductibility
The finance products available for the acquisition of business assets include:-
The rulings around tax deductions for these products vary. The interest portion payable on a loan is tax deductible in all cases. Rulings around when a deduction is realised on the finance repayments varies.
With the very popular Leasing and Rent-to-Own loan types, the monthly lease and rental payments are treated as business expenses and as such are deductible. So in one financial year, businesses can realise the total amount of repayments made in that year. Maximum being 12 x monthly repayment.
With the widely-used Chattel Mortgage, the monthly finance repayments are not treated in the same way as for Leasing and Rent-to-Own. Only the interest portion of the repayment is a deduction.
The main tax deduction realised with Chattel Mortgage is through depreciation of the asset. The ATO has set schedules for depreciation of assets. In simple terms, these rulings allow for a set percentage of the value/purchase price of the asset to be deducted as a business expenses each year. Over multiple years, the full value is depreciated.
When special accelerated asset depreciation tax measures are introduced, such as Instant Asset Write-off and temporary full expensing, businesses taking on new Chattel Mortgage finance can realise a greater benefit.
Instead of a small percentage of the value being depreciated, the full amount is depreciated in the year of purchase under such measure. This represents a significant increase in the tax deduction for that year.
Temporary Taxation Measures for 2022/23
For 22/23 financial year,
temporary full expensing is still available for the purchase of new eligible assets by eligible businesses. Temporary full expensing is an accelerated asset depreciation measure which allows the full purchase price of new assets to be fully realised as a deduction in the financial year of the acquisition.
By deducting this much larger amount than would usually apply under standard depreciation rulings, businesses can significantly reduce taxable income in that financial year. Reduced taxable income means less tax is payable in that year. A factor which can be a major win, especially as businesses seek to recover from businesses losses in the pandemic.
Businesses that opt for temporary full expensing may also be eligible for an additional tax benefit –
Loss Carry Back. To explain, under usual tax rulings, when a business makes a loss in a financial year, that loss is ‘carried forward’ to be claimed an doffset against possible profit made in future years.
With Loss Carry Back, which is also a temporary and current measure, losses made in particular years can be claimed against profit made in specific earlier years. So, if the business made a profit and paid the relevant tax obligations in the financial years 2018/19, 2019/20, 2020/21 and 2021/22 and a loss in 2022/23 or other specified earlier years, they may be eligible for Loss Carry Back.
This may result in the tax which was previously paid being refunded. A cash refund to the business may be received.
To explain the interaction between temporary full expensing and Loss Carry Back – if depreciating and deducting the full price of new assets causes the business to make a loss for that financial year, the business may be eligible for loss carry back and as such receive a tax refund.
So by investing in new assets in 2022/23 could result in a tax refund when the tax return is submitted in July 2023.
What do businesses need to do to realise temporary full expensing benefits?
Businesses first need to ensure their operation and the asset being acquired meet the criteria for eligibility. For assets, it relates to ‘new’, as in new to the business, so refinanced assets would not be eligible.
In order for businesses to implement temporary full expensing, the appropriate form of finance also needs to be selected. Chattel Mortgage is seen as the most suitable. Why? Because the assets must be depreciable which means they must be posted to the balance sheet. In terms of finance, that refers to the ownership of the asset.
With Leasing the ownership of the asset is retained by the lender until the business finalises all payments. With Chattel Mortgage, the asset is accepted as security against the finance and the ownership transfers at time of settlement to the business and is listed in the balance sheet.
For businesses seeking to maximise tax benefits when purchasing new assets in 2022/23, sourcing Chattel Mortgage finance at our cheaper interest rates may be an astute decision.
Contact Business Finance on 1300 000 033 for a Chattel Mortgage quote on the assets being considered for purchase.
DISCLAIMER: THE SPECIFIC PURPOSE IN PROVIDING THIS ARTICLE IS FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED AS THE SOLE SOURCE OF FINANCIAL INFORMATION ON WHICH TO MAKE BUSINESS FINANCE DECISIONS. BUSINESS OWNERS WHO REQUIRE ADVICE OR GUIDANCE AROUND THEIR SPECIFIC FINANCIAL CIRCUMSTANCES ARE RECOMMENDED TO CONSULT WITH AN ADVISOR OR ACCOUNTANT. NO LIABILITY IS ACCEPTED IN REGARD TO ANY MISREPRESENTATIONS OR ANY ERRORS RE ANY DATA, SPECIFICS, POLICIES AND OTHER INFORMATION AS SOURCED FROM OTHERS.
