Plant & Equipment

1. Plant & Equipment

2. Plant & Equipment • Plant are in most cases are expensive purchases • It is very rare that the outlay is immediately recoverable • Therefore you may be required to consider funding options

3. Funding Options • Hire • Buy • Lease

4. Benefits of Hire • As we learnt before you are free to negotiate any terms to a contract but generally • You are not responsible for maintenance or degradation due to fair use. • Entitled to upgrade free of cost • No large capital outlay • When not needed return to hirer • Not responsible for, rego etc • If used for you business all costs are tax deductable

5. Downside to Hire • Use may be restricted • A hire car contract will state car must not be driven on unsealed roads (unless it is a 4WD) • No equity in equipment gained • E.g. Telstra charge $3.50 per month • You can buy the same phone from them for $99 • Therefore after renting for 29 months you have paid for the phone but have no ownership of it

6. Benefits of Buying • Outright ownership • No extra cost such as leasing fees, interest etc • If finance is used interest component is Tax Deductable • Purchase value can be depreciated and this value can be used as a Tax Deduction • You can use the equipment as you wish

7. Downside to Buying • Use of Capital that may be needed elsewhere • Cost is not immediately tax deductable • Responsible for the cost of maintenance etc • Responsible for rego etc

8. Benefits to Leasing • All payments are tax deductable • Capital is free for use elsewhere • Equity is gained at end of lease • If structured correctly it may be possible to update equipment efficiently

9. Downside to Leasing • Extra Cost due to Interest • Large payment at end

10. Financing Options • Personal Loan • A personal loan allows you to borrow a one-off lump sum and make regular set payments to pay it back. You can typically spread your repayments over between one to seven years. The longer the term, the smaller the size of the regular repayments you make. • With a personal loan you typically can't redraw the funds you've repaid (even if have repaid more than the minimum required) and unlike a line of credit or credit card you can't use the credit for other purchases. • Most personal loans have a minimum value, which can vary from $1,000 to $10,000 depending on the lender. Also check the maximum - some loans are unlimited and some are capped at $25,000. • Personal loans can be secured or unsecured, which is where a good is used as security against the amount lent. If your loan is secured this can reduce the interest rate and influence the maximum amount lent. Personal Loans secured specifically with a car are called Car Loans

11. Finance Options • Car Loans • Car loans are similar to Personal Loans, however the car being purchased is security for the loan (some lenders may call it a Secured Personal Loan). Having your car as security means that if you default on your loan repayments your car can be seized. Compared to an unsecured loan, this means the interest rates can be lower. • In order for the car to be eligible to be security it generally must meet some criteria. For example: • New - cars may have to be brand new and purchased from a dealer only. New car loans generally have lower interest rates. • Used - can be limited to cars less than seven years old for some lenders, and for many used cars the minimum loan amount may have an impact. • Minimums - secured loan minimums (the borrowing amount, not the car purchase price) can range from $4,000 to $10,000 for car loans. • If your situation may be outside the criteria, check with the lender you're considering before you apply

12. Finance Options • Credit Card • You can use a credit card to buy a car, and it can even be recommended by some lenders if you want to borrow an amount lower than their loan minimum, especially if they have a low rate credit card in their product suite.

13. Finance Options • Car Lease • A car lease is a bit like renting a car for a period, with the option of buying it at the end of the lease for a residual - that is, value or percentage typically agreed up front. • Car leases can be good for: • Consumers whose employer offers salary package for cars through a Novated Lease. • Businesses who don't want to tie up capital owning a depreciating asset.

14. Finance Options • Hire Purchase • Hire Purchase, sometimes called Commercial Hire Purchase, is a finance option where the financier buys the car, and you hire it from them for the agreed term. Similar to a lease, you can include a large payment at the end of the agreement however this is not mandatory. • A Hire Purchase is designed for companies or individuals who use the car for business purposes.

15. Finance Options • Chattel Mortgage • A chattel mortgage is a car finance option suitable for businesses, where the car (the chattel) being purchased is used for business more than 50% of the time. • The business takes ownership of the car straight away without having to tie up capital in the purchase, yet can claim tax eligible benefits on the vehicle. You do have the flexibility to include a payment at the end of the term in order to reduce repayments but this is optional

16. Depreciation • There are 2 concepts when we are talking about depreciation • Business Cost • Tax Purpose

17. Business Cost • This is an attempt to assign a cost due to • Wear & Tear • Drop Saw – you will use it till it dies • Obsolescence • You buy a laptop and is working fine but due to software upgrade it is unusable/unsuitable

18. Business Cost • To determine the Depreciation you first need to determine its useful life & residual value. • For business purposes you can use a realistic estimate • Bobcat = $40 000 New • You will Keep it for say 15 years • At the end of this period you will sell it $5000

19. Calculation Methods • Straight Line Methods Depreciation Amount Per Year = Depreciation Amount Life Note Depreciable Amount = Purchase cost – Residual Value

20. Calculation Methods • Straight Line Methods Depreciation Amount Per Year = $35000 15 years = $2333.33 per year This figure represents the cost to you business each year and is an overhead

21. Depreciation Scedule

22. Calculation Methods • Reducing Balance Method Depreciation Rate for the Year = Gross Revalued amount = Depreciated Value

23. Calculation Methods • Reducing Balance Method Depreciation Rate for the year = Gross Revalued amount = Value at start of using method

24. Methods Reducing Balance Method Depreciation Rate for the year = 1 - 15√(5000/40000) = 13% Depreciation Yr 1 = 13% x $40 000 = $5177.97

25. Comparison of Methods

26. For this course for the Business Method we will only use Straight Line Methods Class Exercise – Depreciate Hilux Ute Initial Purchase Price $35 000 Effective Life 3 Years Sale Price $23 000

27. Tax Cost • This is used to determine you assessable Income • ATO Issues list of Useful Life • This may not be the actual usual life • Used to stimulate industry I.e. Proposed 30% Vehicle Depreciation • May be used to deter actions i.e. Max allowable Vehicle depreciation = $57 000

28. Calculation Method Bobcat = $40 000 Two Allowable Methods Diminishing Value Method Base Value = Depreciated Value at the start of the year Year 1 $40 000 x (365/365) x (1.5 / 7) = $8571.43

29. Worked Example Bobcat = $40 000

30. Calculation Method Bobcat = $40 000 Two Allowable Methods Prime Cost Method Asset Cost = Purchase Price Year 1 $40 000 x (365/365) x (1.5 / 7) = $8571.43

31. Worked Example Bobcat = $40 000

32. Tax Excercise