Chattel Mortgage or Finance Lease. What is the right one for 2024?

With the window for the 100% depreciation tax incentive having now been reduced to $20,000 assets from July 1st, 2023, is a chattel mortgage still the right structure for financing equipment?

The answer depends on the size of your company.

For organisations with an annual turnover of less than $10 million, Chattel Mortgage is still seen as the preferred structure, especially if your organisation has entered into the Simplified Tax System where all relevant assets acquired after July 1, 2023, can been placed into a Depreciation Pool.
Under this structure, relevant assets can be appreciated at 30% diminishing value (15% for the initial year as the asset has not been held for the full 12 months).

For organisations with an annual turnover greater than $10 million, any asset acquired after July 1, 2023, will be subject to the usual depreciation allowances available under the Effective Life categorisation provided by the
ATO. By way of example, if an asset is deemed by the ATO to have an effective life of 10 years, the annual depreciation allowance will be 10% Prime Cost or 20% Diminishing Value.
The links below will provide clarity on both the Effective Life categories as well as an explanation on the difference between Prime Cost & Diminishing Value Depreciation.

For links to the full ATO Depreciation rules, scan the QR code to access our blog post.

Is a Finance Lease a better option for these larger (greater than $10 million turn over) companies?

As an alternative for those larger organisations, we expect to see a return to some assets being financed under a Finance Lease where the actual lease payment is claimed as the deduction, provided the lease structure (term and residual) fits ATO guidelines.

As an example, where an excavator has an effective life of 10 years, the depreciation claimed 5 years may be as little as 50%, whereas under a finance lease (funding the asset over a 5-year term with a 25% residual), the lease has allowed the client to claim deductions (via the lease payments) for 75% of the asset value. Always seek advice from your accountant as to the correct structure

There is no doubt that the 2024 financial year and beyond is a very different landscape to the COVID induced tax incentives of the past few years. Companies should speak with their broker and accountants to ensure they structure their future equipment debt in the most appropriate tax effective manner.

If you would like to know more, get in touch with Miles Beamish
0410 774 506 or send an email to miles@finlease.com.au

Finlease Ptd Ltd have been an Associate member of the CMPA since 2015.

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