Despite the enormous upheaval we have faced over the past 2 years of the Covid Pandemic, many industries particularly in civil related, transport or manufacturing have, for the most part not only survived but have seen significant business growth. Yes, there are currently challenges around supply of equipment & ability to secure skilled labour, but for so many of our clients it has never been so busy. In the landscaping industry alone, we are constantly hearing stories of companies unable to take on additional work for 3 to 6 months, as their pipeline is completely full. In many other industries, there’s consistent noise that their forward runway looks robust for the next 3 to 5 years.
Yes, we have seen a slight increase in prevailing equipment finance rates. In our view, this was predicated on the market pre-emptively pricing in the expected RBA interest rate as they expect this increase to occur sooner than initially predicted. As a result, we expect to see interest rates remain somewhat stable for a while. Despite this slight increase, we would say it needs to be seen in perspective. We are still at very low interest rates, where the cost of financing a $100,000 asset over 5 years incurs an interest cost of $10,000, with the total payable over the 5 year term at $110,000. To put it in simple terms, the overall interest cost is $2,000 p/a. For those with some grey hair, this is extremely low cost debt compared to what we have seen in years gone by.
The government incentives put in place during the pandemic such as the 100% tax write offs on equipment purchases known as the Temporary Full Expensing of Depreciating Assets (TFEDA), were done for a very specific reason, which was to assist our economy in its recovery through support of small businesses growth, as they account for almost 98% of businesses & are the largest employer in Australia, employing over 44% of the workforce.
It is essential that industry see the TFEDA for what it is, arguably the most significant tax incentive that we are likely to see in our lifetime, with companies not only able to write off 100% of assets acquired (including USED assets where the company turnover is less than $50 million p/a) but also an ability to carry back any tax losses and obtain tax refunds on prior tax paid in the financial years as far back as 2019. However, as the economy on the whole (excluding those industries heavily affected by Covid such as Hospitality, Travel & Tourism) has fared substantially better than initially predicted, it’s our view that it’s unlikely there will be an extension to the TFEDA.
Understanding that this incentive has a clear end date in 18 months on June 30, 2023. It is also important to recognise that it will only be applicable to assets delivered and installed ready for use no later than June 30, 2023. In other words, simply having placed an order on a machine that will arrive after that date is currently not eligible for this incentive.
Being cognisant of the above circumstances and knowing that at present there are delays on equipment deliveries from overseas and the real prospect on future orders of potential, significant competition for new equipment from other overseas localities as their respective economies recover, we would recommend now is the time to plan and take action on future new equipment orders. Many suppliers of machinery coming in from overseas are encouraging their clients to place soft orders to get into the production line to ensure they have access to the relevant new machinery within the designated time frame.
The planning you do over the next 6 months will be crucial in ensuring that you can secure the necessary equipment supported by the available tax incentives over the next 18 months.
Read about the 7 quick facts to know about equipment financing in 2022 to help with your equipment planning.
Mark O’Donoghue, CEO Finlease
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