Leasing vs buying
- How long will you keep your asset for? If your purchase will only be used in the short term, less than 2 years, you might consider leasing it. Say for example, you want to buy a laptop for your business, leasing may be the better option. It means you can easily upgrade your computer in a couple of years without the fuss of buying a completely new one. This leads to question number two.
- How frequently will the technology change? If your purchase will go through many upgrades over the next few years (perhaps like a phone or a tablet), it may be wiser to take on short leases instead of straight up purchases.
- Must you purchase brand new equipment? Consider doing a cost benefit analysis of using quality pre-loved equipment. If you can work with used equipment, you’ll likely save money which will increases the amount of capital and/or cash flow available for you to put towards other opportunities. And as we’ve talked about many times on this blog, cash flow is king! Speaking of which…
- What is your cash flow looking like? If you don’t want frequent cash outflows and have a reserve large enough to make a big purchase, then buying is a better option for you. However if you don’t want to have a large cash outflow in one particular part of the year, and would rather smaller, frequent cash outflows, then leasing might be a more viable option for you.
- What are the tax benefits? Usually there is a tax benefit with leasing, where you get to immediately deduct the full lease payment. Buying on the other hand, means you only deduct the interest portion as an expense. However there are other tax benefits you can get with buying an asset depending on your depreciation method. For example if you use the accelerated depreciation method, you can pay less tax on your asset in the early years of its life.
Personal vs business
- Is is for personal or business use? What you can claim changes depending on your individual circumstances. For example, if you’re a tradie you can claim some/all of the cost of your tools (and how much you can claim depends on what kind of tools they are and what kind of tradie you are).
If you work in finance you might be able to claim the cost of your laptop – but only on percentage of time you actually use it for business related activities.
For example: You buy a laptop for $1,500 on 1 October so you have it for 273 out of 366 days (it’s a leap year). A laptop is deemed by the ATO as having an effective life of three years, so using the ‘prime cost method’ you can only claim 33.3% of its cost per year – if it’s largely used just for business:
$1,500 x 273/366 days x 33.3% = $374
TOTAL TAX DEDUCTION: $374 (per year)
But if said laptop lives at home for most of its life and you’re mainly using it for the kids’ homework, then you might want to record how often you use it for business. Then you can only claim a deduction for that portion of its use over its three-year deductible lifetime.
- Are you a small business owner? If you work from home, things like your landline, internet and even electricity might be up for a deduction.
But before you get too excited thinking you can claim a portion of your mortgage or renovations as deductions for home office use, you might want to get some serious professional advice. Why? Because what the ATO giveth as a tax deduction, the ATO can taketh away in the form of Capital Gains Tax on the proportion of your home you’ve previously claimed – should the value of your property go up between when you started claiming a tax deduction and when you sell it.
As with all things financial, before you make any financial decisions that impact your tax liabilities, it’s best to seek professional advice from your accountant. And do be sure you keep all your payment documentation along the way to make things quick and easy for both of you to reference in the future.