Is Equipment Finance Tax Deductible?

Is Equipment Finance Tax Deductible?

Quick answer

Parts of an equipment finance arrangement may be tax deductible, but the full loan repayment is generally not treated as a deduction.

Depending on the structure and business use, a business may be able to claim deductions for interest, depreciation or decline in value, lease payments and certain finance costs. The treatment depends on the asset, finance agreement, business structure and proportion of business use.

This article provides general information only. Confirm the treatment with your accountant or registered tax adviser.

Interest versus principal repayments

A regular loan repayment usually contains:

• principal, which reduces the original amount borrowed

• interest, which is the cost of borrowing

The principal portion is generally not an immediate operating deduction. Interest may be deductible where the borrowed money is used to earn business income.

Your finance statements should help separate the interest from the principal.

Can the equipment itself be deducted?

Business machinery and equipment are generally depreciating assets.

Depending on the rules applying to your business, you may claim the business portion of the asset’s cost:

• over time through depreciation

• through the simplified depreciation rules

• as an immediate deduction where the asset and business meet the relevant requirements

The ATO states that eligible businesses may claim an immediate deduction for the business portion of an eligible asset under the instant asset write-off rules. Eligibility, thresholds and timing rules can change, so check the current position before purchasing.

What if the asset has mixed business and private use?

Deductions generally need to be limited to the business-use portion.

For example, if a vehicle is used 80% for business and 20% privately, the available deductions may need to be apportioned.

Accurate records are important when an asset has mixed use.

Does the finance structure matter?

Yes.

The tax and GST treatment may vary between:

• chattel mortgages

• equipment loans

• hire purchase

• finance leases

Ownership and the way payments are treated can affect when and how deductions are claimed.

The ATO provides specific GST guidance for hire purchase and leasing arrangements.

Practical example

A construction business purchases a skid steer using an equipment loan.

The business may potentially claim:

• interest charged on the loan

• depreciation or an available immediate deduction for the business-use portion

• operating costs such as insurance, repairs and servicing

The principal component of the loan repayment is not normally claimed again as an expense because it relates to the purchase of the asset.

The exact treatment should be confirmed with the business’s accountant.

Common questions

Is the deposit tax deductible?

A deposit is generally part of the acquisition cost of the asset rather than a separate day-to-day expense. Its treatment will depend on the asset and applicable depreciation rules.

Can I claim GST on financed equipment?

A GST-registered business may be entitled to input tax credits where the relevant requirements are met. Timing and treatment depend on the finance structure and intended use.

Is a balloon payment deductible?

A balloon payment is generally part of repaying the financed amount. It is not automatically a separate tax deduction.

Should I choose finance based on tax deductions?

Tax is one factor, but it should not be the only reason for purchasing equipment or choosing a loan. Cash flow, total cost and the commercial need for the asset also matter.

Key takeaways

• Interest may be deductible where finance is used for business purposes.

• The principal repayment is generally not an immediate deduction.

• The asset may qualify for depreciation or an available write-off.

• Private use may reduce the amount claimable.

• Ask an accountant to confirm the treatment before relying on a deduction.

Planning an equipment purchase?

Tattersalls Finance can explain the available finance structures, while your accountant can advise how each option may be treated for your business.

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Note: General information only and not tax advice.