This is a question many SMEs ponder. While leasing may be less risky and ensures equipment is up to date, owning assets outright may be cheaper in the long run. When is it better to lease or buy? Three experts weigh in.
Peter Knight FCPA
Business and franchise accountant, Knight Partners
The answer depends on a number of factors, but one of the biggest advantages to buying an asset outright is the tax benefits – and GST is one of the first to consider.
If you lease equipment, it is similar to renting it from somebody else. This means the GST that you can claim back is limited to the GST on each lease payment.
For instance, if you buy a work vehicle for A$55,000 outright, or use a chattel mortgage financing arrangement, you can claim A$5000 back in your next BAS, as opposed to a couple of hundred dollars each lease payment.
Tax incentives, such as the instant asset write-off, may be another advantage to buying rather than leasing.
However, leasing can have advantages, too, particularly when interest rates are low.
For instance, if you are considering buying an asset that is worth A$100,000, if you could get finance at 4 per cent interest, you could keep that A$100,000, or invest it in something else that is going to deliver a return greater than what the 4 per cent interest rate is going to cost.
In this case, SME owners should ask themselves: “Can I get a better return on my investment than what the current interest rate is going to cost me?”
Tax incentives, such as the instant asset write-off, may be another advantage to buying rather than leasing. However, leasing can have advantages too, particularly when interest rates are low. Peter Knight FCPA
There are factors for and against leasing or buying, which SME owners need to carefully weigh up. However, when I talk to clients about any form of financing, including leasing, I advise them to match the life of the loan with the life of the asset.
Kirsty Donachie CPA
Founder and principal accountant, The Pen Accounting Services
With the economic uncertainty caused by COVID-19 and the winding up of stimulus packages, many clients are weighing up their options to buy assets outright or to lease them.
This is a common question for SMEs, and one question that can only be answered after considering the cash flow position of your business.
Leasing may be an easier way to obtain your equipment, with regular monthly repayments rather than one larger outlay.
However, SMEs must consider all aspects of this option, such as the high cost of interest, lock-in clauses and what this means if your business circumstances change over the term of the agreement.
For most SMEs, buying an asset and taking advantage of instant asset write-off opportunities, now known as temporary full expensing, would definitely be a better solution in the current business environment.
Along with financial benefits allotted through tax savings and lower interest compared to leasing, buying equipment also provides ownership flexibility.
To lease or not to lease? Unfortunately, one answer does not fit all businesses.
It is important that SMEs and their accountants do their homework before committing either way. Prepare a cash flow statement, look at the surplus cash and take into consideration future growth plans for the business to determine what option is right for the client.
For most SMEs, buying an asset and taking advantage of instant asset write-off opportunities, now known as temporary full expensing, would definitely be a better solution in the current business environment. Kirsty Donachie CPA
When it comes to considering lease agreements, be sure you do not find yourself in a perpetual loop of lease agreements, balloon payments and high interest rates, while never physically owning the asset.
Saurav Wadhwa CPA
Director, IBBZ Accounting
I believe it all comes down to the kind of business you want to create and the strategies and vision you want to have for your business.
For us, we never wanted to create something big, so owning everything outright suited us very well. Especially in the recent economic downturn, we did not have to worry about a lot of fixed cost, as we don’t have much fixed cost other than the employee payroll.
However, if you are passionate about a great business idea, and if you put your customer interest first, then there is a high chance that your business can easily become big. You may not be able to micromanage the business, and you will have to invest money.
In that case, leasing assets can be very useful. You can get the latest tools and all the “bells and whistles” required for the business. You can potentially find investors to invest in the business.
Partnership with a bank can also potentially open considerable funding. This means that, instead of receiving gradual growth, you can witness your business growing rapidly.
I believe it all comes down to the kind of business you want to create and the strategies and vision you want to have for your business. Saurav Wadhwa CPA
At IBBZ Accounting, our philosophy from day one was different to this. We made the money first, and gradually invested it back into the business.
When weighing up whether you should lease or buy, I recommend going back to your business vision and what exactly you want to create in the long run.
Meet the experts
Peter Knight FCPA
Peter Knight FCPA is owner of Knight Partners and founder of the Franchise Accountants Network, which provides franchise-specific discussion groups and networking for CFOs and senior accountants in the sector. Knight has lectured and tutored in advanced financial accounting at Macquarie University, and is a regular speaker at conferences, presenting widely throughout Australia and overseas.
Kirsty Donachie CPA
Kirsty Donachie CPA is the founder and principal accountant of The Pen Accounting Services, located in Sydney. The firm specialises in providing business accounting and taxation support to creatives, start-ups and entrepreneurial SMEs.
Saurav Wadhwa CPA
Saurav Wadhwa CPA is managing director at New Zealand-based IBBZ Accounting. IBBZ Accounting specialises in tax disputes and resolutions, including tax audit representation. The firm was a finalist in Westpac Auckland Business Awards: Strategy and Business Planning 2018.