Australia: Asset funding sources for investment in capital assets for farmers

Last Updated: 23 January 2014

How asset funding choices can make or break your farming business

The decision to acquire assets is a major commitment for many businesses. For rural enterprises in particular, there is often a need to purchase expensive capital equipment, and the funding of those capital acquisitions requires careful planning.

The key business decision is whether to fund the acquisition outright, using available cash, or to spread the cost of funding over a set period. Rather than paying for the asset outright using cash, it can often make sense, from a cash flow perspective, to look for ways of spreading the cost of acquiring an asset. By financing the asset purchase, you are able to spread the cost of owning or leasing the asset so that those costs better coincide with the timing of the revenue generated by your business.

The most common sources of available medium term finance for investment in capital assets are:

  • Hire purchase.
  • Chattel mortgage.
  • Leasing.

Hire purchase, chattel mortgage and leasing are all examples of financing facilities. These financing facilities allow you to use a new farming asset over a fixed period, in return for regular payments back to a finance company. The regular, fixed nature of the hire purchase, chattel mortgage or lease payments, and the defined terms of funding, can be a great assistance with forecasting your cash flow and planning your business activities accordingly.

It is important to note that these types of financing facilities are medium to long term contractual commitments, so it may not be possible to terminate them early. Or if it is possible, it may prove costly to do so (in terms of fees, charges, interest payable recalculations etc). So this does need to be taken into account when initially considering a financing contract.

However, as long as you make all of your scheduled payments, these facilities offer you the advantage of being secure medium to long term funding facilities which cannot be withdrawn or repayable on demand, unlike overdraft facilities.

What is the difference between hire purchase and chattel mortgage?

A hire purchase contract is a legally binding agreement between you and your financier. The amount repayable is calculated over a fixed term at a fixed rate with fixed repayments (usually monthly). Generally, you will have a choice of a residual value (or lump sum balloon payment) when the term expires, depending on the age, type, usage and depreciation of the financed goods. A hire purchase agreement is a contract for the hire of goods where the title in the goods remains with your financier. The title does not pass to you until either the option to purchase is exercised by you, or the final installment is paid.

Alternatively, under a chattel mortgage agreement, you take title in the chattel from the time of purchase. You finance the purchase price (or part thereof) of the chattel by way of a loan obtained from your lender and then apply the borrowed funds as payment to the supplier for that chattel.

What is the difference between a lease and hire purchase/chattel mortgage?

A finance lease allows you the use of the goods for the specified lease period. However, the lessor who grants the finance lease remains the owner of the asset until all rentals have been paid by you, including the residual value.

Funding advantages and disadvantages

Each funding option has unique advantages and disadvantages that, depending on your situation, will mean that one option will suit you more than another. Your Moore Stephens Accountant and Advisor can help you assess your funding options and advise how each of the advantages and disadvantages below relate to your specific circumstances.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.

Cash Funding
Advantages Disadvantages
  • This is a quick and simple method of funding asset purchases.
  • Your business will be entitled to a capital allowance (depreciation) tax deduction, each year, over the useful life of the asset.
  • No other additional funding costs following the initial purchase, which allows you to assess cash flow accordingly.
  • If your business is registered for GST, the GST component will be claimable upfront, in the Business Activity Statement, when the purchase is made (provided a valid tax invoice is held, subject to business use percentage application).
  • Usually not a viable option for expensive capital assets as there may not be sufficient cash flow to fund the purchase, whilst maintaining payment of other day-to-day business expenses.
Leasing
Advantages Disadvantages
  • Lease repayments are tax deductible when paid.
  • The GST component is claimable on each lease repayment.
  • Given lease payment are fixed, you can plan cash flow around a known cost.
  • Where the equipment may become obsolete quickly (e.g. computers, laptops), a leasing arrangement allows you the flexibility to return, upgrade or continue to lease the equipment at the end of the term.
  • As the lessor is the legal owner, you are not entitled to capital allowance (depreciation) deductions throughout the useful life of the asset.
  • As the lessor is the legal owner, you are not entitled to an upfront GST claim on the initial purchase price of the asset.
  • Various fees and charges may apply to obtain the funding facility.
Hire Purchase
Advantages Disadvantages
  • Interest paid throughout the term of the hire purchase can be claimed as a tax deduction.
  • Your business will be entitled to a capital allowance (depreciation) tax deduction, each year, over the useful life of the asset.
  • The full GST component on the hire purchase agreement can be claimed upfront in the Business Activity Statement (provided a valid tax invoice is held, subject to business use percentage application).
  • Fixed regular, or structured repayments allow you to better manage your cash flow.
  • Flexible balloon payment options are available, which can be used to minimize the impact on cash flow.
  • The title in the goods does not pass to you until either the option to purchase is exercised by you, or the final installment is paid.
  • Various fees and charges may apply to obtain the funding facility.
  • The principle (or capital) portion of the repayments is not tax deductible.
Chattel Mortgage
Advantages Disadvantages
  • You take title in the chattel from the time of purchase.
  • The full GST component on the chattel mortgage agreement can be claimed upfront in the Business Activity Statement (provided a valid tax invoice is held, subject to business use percentage application).
  • Interest paid throughout the term of the chattel mortgage is tax deductible.
  • Your business will be entitled to a capital allowance (depreciation) tax deduction, each year, over the useful life of the asset.
  • Fixed regular, or structured, repayments allow you to better manage your cash flow.
  • Flexible balloon payment options are available, which can be used to minimize the impact on cash flow.
  • The principle (or capital) portion of the repayments is not tax deductible.
  • Various fees and charges may apply to obtain the funding facility.
  • As your business legally owns the equipment from the time of purchase, you bear the responsibility of trying to sell the asset once it needs replacing or becomes obsolete.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.

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