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When choosing whether to buy or lease plant, equipment or vehicles for your business, you need to consider what your business needs are and your finances.
In this module, find out about:
- leasing vs buying
- leasing or buying a motor vehicle
- how GST applies to motor vehicles
- leasing or buying plant and equipment.
Leasing vs buying
When acquiring plant, equipment and vehicles for your business, you have the option to lease or buy.
Leasing means you borrow your plant, equipment or vehicle under a contract. Leasing requires less commitment than buying and makes it simple to upgrade when your lease finishes. However, there may be restrictions in place on what you can do with the plant, equipment and vehicles you lease, depending on your contract.
Buying means you purchase and own the plant, equipment or vehicles outright. If you don’t have sufficient cash to buy it outright, there are finance products available to help you. The financier will keep an interest in your plant, equipment or vehicle until they’re paid back. Buying will mean more commitment, as you won’t be able to simply return it after a lease runs out. It also means you have freedom to make alterations to fit your needs.
Leasing or buying a motor vehicle
A motor vehicle is a major expense. When deciding whether to buy or lease the motor vehicles you need for your business, consider the advantages and disadvantages of each option.
Pros and cons of leasing a vehicle
- You can easily upgrade your vehicle every two or three years when your lease ends.
- You generally need less money upfront to lease.
- As the vehicles you lease tend to be newer, they might still be covered by their manufacturer’s warranty. Your lease may also cover some of the repair costs if required.
- It may make managing your cash flow easier, as you won’t have your money tied up in a depreciating asset.
- It can end up costing just as much as getting a car loan when you take into account the monthly repayments, fees and charges.
- You won’t be able to make any alterations to the vehicle.
- You can’t claim the car as your own asset for other borrowing or financial purposes.
- You may not be able to get approval for a lease if you have a bad credit history.
- You may be locked in to making payments for the entire lease period, even if you cease using the car.
Pros and cons of buying a vehicle
- With a car loan, you can make similar repayments to leasing, but will end up owning the car outright.
- Whether you take out a car loan or buy the vehicle outright, you can claim the car as your own asset.
- You will have the freedom to modify the vehicle to meet your needs as long as the modifications are permitted within law.
- Buying usually requires a larger upfront cost than leasing.
- The value of your vehicle will depreciate in time, making your investment less valuable.
- If you use the vehicle to secure your finance it can be repossessed if you fail to make repayments.
- Upgrading your vehicle means you will need to go through the process of selling your current vehicle and buying a new one.
Tips to consider
Whether you’re leasing or buying a vehicle, keep these tips in mind:
- Make sure you deal with reputable companies who will help you work out the best option.
- Don’t just take the first deal you’re offered – shopping around can often secure you a much better deal. This includes shopping around for a good rate if you’re taking out a car loan.
- If you decide to lease your vehicle, consider how much you can afford to pay each month.
- Consider other options before you decide to sign anything at the dealership.
- Look into buying a demonstration model vehicle. It can often save you money and may come with a variety of extras.
If you’re still unsure whether it’s better for you to buy or lease, seek advice from your registered tax professional or financial adviser to help you make the best financial decision for your business.
Financing options to help you buy a vehicle
If you want to buy but don’t have enough finance to pay upfront, your business can obtain finance through a bank or other financial institution. Generally the loan will be secured by using the car as a guarantee.
If you purchase your car from a dealership, they often will have financing available as an option. Make sure you do your research before signing up for dealer financing options, as they may include rates and fees that add to the cost. Dealer finance can also include a large payment at the end known as a ‘balloon’ or ‘residual’ payment. This is designed to lower your ongoing repayments, but you will need to plan ahead for how you will fund this lump sum when the finance term ends.
Did you know?
Guaranteed asset protection (GAP) insurance can cover your remaining repayments if you purchase your vehicle under a loan, and the vehicle is written off due to accidental damage or theft before you’ve finished repaying it.
GAP insurance will have limits on how much the policy will pay out, so make sure the limit on your policy is enough to cover the difference between the amount remaining on your loan and the amount insured by your motor vehicle insurance.
You will usually be required to have a comprehensive motor vehicle insurance policy before you are eligible for GAP insurance.
Talk to your insurance broker, financial advisor or registered tax professional for more information.
Goods and services tax (GST) and motor vehicles
If you use a motor vehicle for your business and you're registered for GST, you might be entitled to claim a credit for the GST you‘ve paid in the price of the vehicle as long as you have a tax invoice.
If your vehicle is used partly for business, you will need to apportion your GST credits based on how much you use the vehicle for business purposes. You can make adjustments later if the proportion of business use changes. If your vehicle is a car, you can only claim GST credits up to the luxury car tax limit.
You have to account for GST when you dispose of a motor vehicle if it is a taxable sale.
Find out more on GST and motor vehicles on the Australian Taxation Office website, including information on rules concerning:
- luxury cars
- leased vehicles
- purchasing second-hand
- disposal to an associate
- disposal by a charity.
Leasing or buying plant and equipment
Your plant and equipment, such as machinery, tools, appliances, office furniture and office equipment, is vital for you to operate your business. To make sure you are getting the best deal, do your research before you decide whether to buy or lease what you need.
Aside from comparing the overall costs of buying or leasing, make sure you also consider:
- ongoing maintenance
- tax deductions that you may be eligible for
- equipment becoming out-dated or expiring
- the flexibility between leases and loans.
You can have a mix of leased and purchased equipment to best fit your business’s situation and needs.
Pros and cons of leasing your plant and equipment
- It’s easier and quicker to update to the latest equipment if you lease it than if you buy it.
- You can budget for the equipment over a longer time as you will make smaller regular payments rather than paying a lump sum upfront to buy.
- You may be able to claim your leasing costs as a tax deduction each year if the equipment is solely used for your business.
- You will have more flexibility to try something new, as you don’t have as much commitment as if you buy. This also gives you more choice when it comes to the type of equipment you get.
- If something breaks or has issues due to normal wear and tear, the leasing company is usually in charge of fixing the equipment, saving you maintenance and repair costs.
- You may end up paying more over time than you would if you had bought it upfront.
- As you don’t own the equipment, you won’t be able to sell the equipment once you are finished. So there is no potential to make any money back.
- You may be forced to pay for and keep a piece of equipment for longer than you need if the lease term is strict.
- Depending on your leasing company, the brands or models you want could potentially be unavailable and you may have to settle for something else.
- As maintenance usually is the responsibility of the leasing company, it may be difficult to get things fixed if you disagree about the terms and conditions of the repairs. There may also be additional problems if your leasing company requires you to use certain repairers, who may not be located near you.
Pros and cons of buying your plant and equipment
- You have complete control over what you get. You’re not limited by a leasing company’s stock, so if you want a particular model or brand, you have the ability to order exactly that.
- As repairs and maintenance are your responsibility, you can make sure problems get fixed immediately.
- You can sell the equipment when you no longer need it, allowing you to recover some of the cost.
- You may be able to claim depreciation costs as a tax deduction.
- You won’t have to deal with agreements and contracts as you simply pick out what you need and pay for it. This can be good for smaller equipment that is easy to store, as well as equipment that has a long life.
- Since you own the equipment, you can alter it according to your needs.
- It may be difficult to pay for expensive equipment all at once. If you don’t have the cash flow to purchase what you want, you may be forced to settle for a lower-cost option.
- You will have to pay for repairs and maintenance unless it’s covered by warranty or insurance. Keep an eye on the product warranty to see if it covers repairs and for how long.
- For technology that is outdated quickly, you are stuck with it because you own it and may not be able to recover much value back even if you sell it.
8 tips to consider before you buy
When buying equipment for your business, it’s important that you shop around for the best deal that suits your needs. You should also carefully assess the long-term value of each piece of equipment you’re purchasing.
Before you buy, consider these eight tips:
Make a list - It’s important to first create a list of your equipment needs and wants before you start purchasing. This list should form part of your business plan and be something you continue to update and revise as your business grows.
Check out our Plan for success module for more on business planning.
Check if there are items you can outsource - As part of your list, identify what you might be able to outsource instead of having to purchase the equipment. For example, you may be able to get by without a copier or printer and pay for external printing services to cut down on your initial capital investment and to avoid cluttering your workspace.
Design your space - No matter the kind of business you have; a salon, restaurant, office or retail store, it’s important to have accurate measurements of your workspace before you buy your equipment.
Measure the area where you plan to place your equipment to find out the dimensions you’ll need. You could also use a digital space planning tool to first digitally design your space and work out the furniture and fixtures you need.
Work out if you are buying new or used – While you may prefer to buy everything new, when you’re working with a limited budget, you can save money by buying some of your equipment second hand. Consider what equipment you need to buy new and what equipment you may be able to buy used.
Choose quality over price – Don’t simply look at the price when deciding what to purchase. If a piece of equipment frequently breaks down or doesn’t meet your needs, it could end up costing you more than if you had purchased something more expensive in the first place. While price is important in deciding what to purchase, the greater focus should be on quality and value.
If you find a deal on something you need, take the time to do some research on the model. Looking at consumer reviews and feedback can give you an indication of whether the item is good quality and will meet your needs.
Check if there is a local repairer for your equipment – If your equipment requires repairs, having a local repairer who can fix it can save you time and money. It’s also a good idea to check if spare parts required for your equipment are readily available or can be imported.
Consider what your most important items are - For the critical items you need to run your business, you might consider spending a little extra for better quality and reliability.
For example, if you’re running a restaurant, it’s important to make sure your critical items such as knives, ranges and pots and pans can produce quality food while withstanding heavy use.
Check your available cash - If you don’t have enough cash to cover the cost of all of your equipment needs, there are financing options such as a small business loan or buying through a hire purchase agreement. If you choose to get finance through these options, consider the interest rate and how long you’ll take to pay back the amount owed. Talk to your financial advisor or tax professional if you are unsure.
If you don’t have enough cash to purchase the equipment or plant you need for your business, there are different options to get finance:
- Loans - to buy a key plant or equipment for your business you might opt to take out an equipment loan. You can generally get a tax deduction for the interest payable on the loan.
- Hire Purchase (HP) agreements - a HP agreement means a bank or financier will buy the equipment and initially hire it to your business for an agreed period of time. At the end of the term, the equipment becomes yours. A HP agreement can help you if you don’t have enough cash to outright buy the asset, but want to eventually own the asset.
- Leases - some leases can also mean you end up owning the leased equipment. This works through the leasing company initially owning the equipment and agreeing to lease it to you for an agreed period. The payments on the lease can be structured with a residual value balance, and will give you an option to purchase the equipment at the end of the agreement. This has the advantage of making the initial cash flows more manageable.