With the window for the 100 per cent depreciation tax incentive having now been reduced to $20,000 assets from 1 July, 2023, is a chattel mortgage still the right structure for financing equipment?
The answer depends on the size of your company.
For organisations with an annual turnover of less than $10 million, Chattel Mortgage is still seen as the preferred structure, especially if your organisation has entered into the Simplified Tax System where all relevant assets acquired after July 1, 2023 can been placed into a Depreciation Pool. Under this structure, relevant assets can be appreciated at 30% diminishing value (15 per cent) for the initial year as the asset has not been held for the full 12 months). This ATO link will provide a comprehensive overview.
For organisations with an annual turnover greater than $10 million, any asset acquired after 1 July 2023, will be subject to the usual depreciation allowances available under the Effective Life categorisation provided by the ATO. By way of example, if an asset is deemed by the ATO to have an effective life of 10 years, the annual depreciation allowance will be 10 per cent Prime Cost or 20 per cent Diminishing Value. These links will provide clarity on both the Effective Life categories as well as an explanation on the difference between Prime Cost & Diminishing Value Depreciation.
Is a Finance Lease a better option for these larger (greater than $10 milion turnover) companies?
As an alternative for those larger organisations, we expect to see a return to some assets being financed under a Finance Lease where the actual lease payment is claimed as the deduction, provided the lease structure (term and residual) fits ATO guidelines. As an example, where an excavator has an effective life of 10 years, the depreciation claimed 5 years may be as little as 50 per cent, whereas under a finance lease (funding the asset over a 5-year term with a 25 per cent residual), the lease has allowed the client to claim deductions (via the lease payments) for 75 per cent of the asset value. Always seek advice from your accountant as to the correct structure.
There is no doubt that the 2024 financial year and beyond is a very different landscape to the Covid induced tax incentives of the past few years. Companies should speak with their broker and accountants to ensure they structure their future equipment debt in the most appropriate tax effective manner.
If you would like to know more, get in touch with Scott Kemp 0448 400 141 at Finlease, or send an email to email@example.com.
Finlease is a sponsor of APPMA.