4 things to consider when upgrading equipment or premises

Your business is growing and pushing at the seams, so you’re thinking about investing to increase your capacity. Whether you are looking at new equipment, business vehicles or expanded premises, here are some things to consider before you take the next step.

1. Is this the right time to invest in upgraded equipment?

The first thing to consider is the timing of your business expansion. Are you sure the market will support the extra turnover you envisage? Is this the right time to get the best deal on purchases?

 

The answers will have as much to do with market forces as the strength of your business. 

 

If prices and interest rates are low, then you may be more confident about taking out finance to grow. Or there may be seasonal reasons to make purchases at a certain time, such as when demand is low and prices may be trimmed.

2. How do the costs of upgrading weigh up against the benefits?

You’ll have to crunch some numbers and consider both sides of the ledger when making this assessment.

 

Questions to ask yourself include:

 

• What increases in sales, production and most importantly, profits, will your new investment give you over the year(s)? Consider this over the projected life of the new equipment or premises.
• How much depreciation and interest will you be able to claim on the new equipment?
• How much do you estimate you’ll receive from selling existing equipment or property?

 

Balance your answers against other factors such as:

 

• The costs of outright purchase, lease repayments or interest on loans.
• The repair costs you have incurred with the current equipment or vehicles, and how much you would have to put aside to cover increasing costs in the future if you don’t replace them.
• The time and money that breakdowns and repairs currently cost you.
• The profit potentially being held back by being in smaller business premises.

 

You may wish to seek professional advice as you weigh up the pros and cons of investing in new equipment or upgraded premises.

3. What’s the difference between hire-purchase and leasing?

For a flexible solution that could suit your cash flow, you may wish to consider obtaining vehicles through hire-purchase or leasing. The main differences are that:

 

• With leasing, ownership remains with the vendor, though you may have the option of purchasing the vehicle or equipment at the end of the lease. Leasing payments are generally fully tax deductible, and if eligible you can claim back the GST too.
• With hire-purchase, regular repayments are made and the ownership reverts to you, the lessee, at the end of the contracted period. You will be able to depreciate the assets at tax time and may be able to claim interest payments as tax deductions, while claiming all the GST up front.

 

Learn more about the tax implications of these two options on the ATO’s hire-purchase and leasing page. 

4. Would a business loan be the best option?

If you’re comfortable with paying a lump sum for outright ownership of equipment, a vehicle or another upgrade, you could consider a business loan. In common with hire-purchasing, you should be able to depreciate the assets you purchase, claim the GST, and claim loan interest payments as tax deductions.

 

Just one watch out. If you find that the depreciation rates are low, it may be better to lease.

 

Your tax professional should be able to confirm all the details of what you can claim for, how much you can claim, and how to claim – some of which varies according to your business structure and turnover. You may also wish to talk to a Westpac specialist about your options for vehicle and equipment finance.