Lease vs buy business assets in Australia. Which is best?

Lease vs buy business assets in Australia. Which is best?

If you're a business owner, you may be thinking about acquiring new equipment as conditions continue to improve in Australia. There are two main options for doing this: lease or buy. When weighing up which is best for you, you have a few factors to consider, including the need for future flexibility, your risk tolerance and the type of industry that you work in.

The question is, which way will provide your company with more value? In some cases, leasing may make more sense but in other scenarios purchasing may be a better option. Let's take a look at some of these different points so you can decide which route is best for you!

Whether it’s a new delivery van or a high-end digital printer, problem free equipment and tools are essential to keep your business running smoothly.

In the May 2021 Federal Budget, the government announced full write-off of eligible business assets will be available for another year, so the opportunity to tool up is even more attractive.

Issues to consider

Unfortunately, deciding the best way to acquire business assets is not always straightforward as you weigh up whether to buy outright or lease.

With leasing, you are able to use the plant or equipment under the terms of a contract and return it when your lease expires. Whereas buying means you purchase and own the equipment outright. If you have insufficient cash to buy an asset, you can also finance your purchase and repay the lender over time.

For both buying and leasing it’s not just the immediate costs and tax benefits you should bear in mind. You need to calculate the total costs, including ongoing maintenance, usage conditions, termination fees and equipment return.

You also need to review whether your business’s cash flow is steady and reliable, and allows you to commit to regular lease payments, or is subject to seasonal fluctuations.

Impact on your tax bill

A key factor to consider when it comes to the lease or buy decision is tax, as there can be valuable tax benefits if you buy an asset outright.

At the moment, the government’s COVID-19 temporary full expensing provisions provide a significant tax incentive to buy new equipment. These instant write-off incentives allow you to claim the cost of your asset against your business’s tax bill in the year of purchase.

For many eligible businesses, these tax incentives could tip the scales towards buying rather than leasing between now and 30 June 2023.

GST and leasing

The rules around claiming GST credits also favour purchasing.

When you lease equipment for your business it’s similar to renting, so you can only claim GST credits for your lease payments, not the total cost of the asset. For example, if you purchase equipment valued at $66,000 (including GST) you can claim back $6,000 in GST credits in your next BAS, but only a couple of hundred dollars for each monthly lease payment.

If you purchase a vehicle for business purposes valued at over the annual car limit ($60,733 in 2021-22), the maximum amount of GST credit you can claim is one-eleventh of the limit ($5,521 in 2021-22). If you pay luxury car tax on a vehicle you purchase for your business, you are unable to claim GST on the tax paid.

Leasing is still attractive

Although buying can be sensible for some businesses, if you have insufficient cash to cover the cost of new equipment leasing still offers benefits, especially while interest rates are low.

Leasing also allows you to keep working capital within the business and available for other uses. For example, if you want to acquire an asset worth $120,000 and finance it at 4 per cent interest, your business retains the $120,000 on its balance sheet and still has access to it if required.

What’s more, you may be able to invest the $120,000 and achieve a return higher than 4 per cent.

In addition, leasing is often more appropriate for assets that rapidly become obsolete and need regular updating, such as IT equipment.

Leasing new equipment can also make it easier to match regular monthly loan repayments to your business cash flow, rather than having to make a large one-off outlay for the asset.

Making your decision

Whichever way you are leaning – buy or lease – it’s important to review your business cash flow, your future growth plans and the current business and economic outlook.

Your personal approach to your business is also a factor to consider. Some owners prefer the certainty of ownership and not having to worry about a lot of fixed costs. For others, it’s more important to have access to the latest equipment and to focus on rapidly expanding their operation.

If you would like to discuss whether buying or leasing would be best for your business in the current economic environment, call us today.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Find the weak links in your business and make it stronger

Find the weak links in your business and make it stronger

The many upheavals of the COVID pandemic have provided a grim reminder that in business, there will always be factors beyond our control. That’s why it’s important to put measures in place to manage those factors we actually can control.

Many businesses have recently been given some strong lessons in where their vulnerabilities lie. Even if your business came through 2020 relatively unscathed it’s now a good time to think about these areas and put some measures in place to become more robust. While it can be difficult to protect your business against all of the potential unknowns out there, let’s look at some common risks and business weaknesses that you can address.

Disaster recovery plan

A disaster recovery plan (DRP) helps keep your business afloat and functioning well despite an emergency – whether it be through an information security risk, the loss of assets from a natural disaster such as bushfires, or even human error, such as deleting data.

These plans are quite often developed in the early days of a business and then kept in a drawer, only to be forgotten about in the day to day running of the business. While you shouldn’t need to consult the plan on a regular basis, it pays to re-familiarise yourself with it and if you don’t have one at all, now is the time to make one!

Interruptions to supply

Another area to investigate is your relationship with your suppliers. Are you reliant on particular suppliers or contractors? If so, you’re open to risk. What would happen if they are no longer able to supply to you because they cease their current services or their business folds?

Perhaps geographical instability or supply chain uncertainty could affect your supplier or contractor. The Global Supply Chain Risk Report found that increasingly buyer relationships are with suppliers located in high-risk countries.i

Assess and develop redundancies to ensure the continuation of a quality supply of the product or service. Figuring this out before an issue arises will mean you have options, should the situation unfortunately rise.

Client experience

You know your business back to front, but put yourself in the shoes of your customer. How do they access information about your business, where do they go for help and what potential roadblocks do they face in securing your services?

It’s worth testing every touch point your client makes with your business. Doing so will give you valuable insight into what their customer journey is like, whether it’s experienced in person, online, through support, accounts and day to day.

Mystery shoppers, a service often provided by market research organisations, are trained to report on what they find when doing an ‘audit’ of a business. You don’t necessarily need to hire a research company, a family member, friend or acquaintance could undertake the process. Perhaps they walked into the reception of your office and were ignored by your receptionist, or they had the door held open for them and were offered a friendly greeting. They may have had issues navigating your website or were left hanging on the phone for a long time. Their perspectives, as people with no vested interest in your organisation, are incredibly valuable.

Online assets

Don’t just focus on the external ‘face’ of your business though – you also should ensure that internal systems and intellectual property are protected. This has become increasingly difficult as the traditional work paradigm moves to remote work and flexible work arrangements. Penetration testing, or a pen test is where a simulated ‘cyberattack’ is performed so any weaknesses can be detected. Through this test you’ll find out how vulnerable your systems are to unauthorised hacks.

This preventative measure can save your business by establishing and strengthening security measures which ensure your continued service online, workflow within the business and client data management.

Reviewing where you are vulnerable and assessing which aspects of your business or processes can be improved is a worthwhile task for any business. Knowledge is power and identifying your weaknesses gives you the opportunity to address them and build a stronger foundation for business growth and success.

i https://www.dnb.co.uk/perspectives/supply-chain/global-supply-risk-report-q12018-cranfield.html

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.