With the window for the 100% depreciation tax incentive having now been reduced to $20,000 assets from July 1st, 2023, which is the right structure for financing equipment, chattel mortgage or finance lease?
The answer depends on the size of your company.
Chattel Mortgage remains the favoured choice.
Especially if you’ve opted into the Simplified Tax System, assets acquired post-July 1, 2023, can be added to a Depreciation Pool.
Under this structure, relevant assets can be depreciated at 30% diminishing value (15% for the initial year as the asset has not been held for the full 12 months).
Learn More>> 🔗 ATO’s Overview on Simplified Tax for Small Business
Assets purchased after July 1, 2023, will adhere to the usual depreciation allowances under the Effective Life classification by the ATO.
For instance, if an asset is determined by the ATO to have a 10-year lifespan:
Annual depreciation will be:
– 10% (Prime Cost) or
– 20% (Diminishing Value)
Learn More >> 🔗 ATO on Effective Life of an Asset 🔗 Prime vs. Diminishing Value
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.
To illustrate: An excavator with an effective lifespan of 10 years might only offer:
– A mere 50% depreciation over a 5-year span.
– However, a finance lease over 5 years (with a 25% residual) permits deductions equal to 75% of the asset’s value
There’s 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.
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