Plant & Equipment

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

Funding Options

• Hire• Buy• Lease

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

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

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

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

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

Downside to Leasing

• Extra Cost due to Interest• Large payment at end

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

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

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.

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.

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.

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

Depreciation

• There are 2 concepts when we are talking about depreciation– Business Cost– Tax Purpose

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

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

Calculation Methods

• Straight Line Methods

Depreciation Amount Per Year =

Depreciation Amount Life

Note Depreciable Amount = Purchase cost – Residual Value

Calculation Methods

• Straight Line Methods

Depreciation Amount Per Year =

$3500015 years = $2333.33 per year

This figure represents the cost to you business each year and is an overhead

Depreciation Scedule

Opening Vaue

Effective Life

Depreciation Amount

Depreciated Value

Year 1 40,000.00$ 15 2,333.33$ 37,666.67$ Year 2 37,666.67$ 15 2,333.33$ 35,333.33$ Year 3 35,333.33$ 15 2,333.33$ 33,000.00$ Year 4 33,000.00$ 15 2,333.33$ 30,666.67$ Year 5 30,666.67$ 15 2,333.33$ 28,333.33$ Year 6 28,333.33$ 15 2,333.33$ 26,000.00$ Year 7 26,000.00$ 15 2,333.33$ 23,666.67$ Year 8 23,666.67$ 15 2,333.33$ 21,333.33$ Year 9 21,333.33$ 15 2,333.33$ 19,000.00$ Year 10 19,000.00$ 15 2,333.33$ 16,666.67$ Year 11 16,666.67$ 15 2,333.33$ 14,333.33$ Year 12 14,333.33$ 15 2,333.33$ 12,000.00$ Year 13 12,000.00$ 15 2,333.33$ 9,666.67$ Year 14 9,666.67$ 15 2,333.33$ 7,333.33$ Year 15 7,333.33$ 15 2,333.33$ 5,000.00$

Straight Line Method

Calculation Methods

• Reducing Balance Method

Depreciation Rate for the Year =

Gross Revalued amount = Depreciated Value

Calculation Methods

• Reducing Balance Method

Depreciation Rate for the year =

Gross Revalued amount = Value at start of using method

Methods Reducing Balance MethodDepreciation Rate for the year =

1 - 15√(5000/40000) = 13%Depreciation Yr 1 = 13% x $40 000 = $5177.97

Carried Vaue Rate Depreciation

Amount Depreciated

Value Year 1 40,000.00$ 13% 5,177.98$ 34,822.02$ Year 2 34,822.02$ 13% 4,507.69$ 30,314.33$ Year 3 30,314.33$ 13% 3,924.17$ 26,390.16$ Year 4 26,390.16$ 13% 3,416.19$ 22,973.97$ Year 5 22,973.97$ 13% 2,973.97$ 20,000.00$ Year 6 20,000.00$ 13% 2,588.99$ 17,411.01$ Year 7 17,411.01$ 13% 2,253.85$ 15,157.17$ Year 8 15,157.17$ 13% 1,962.09$ 13,195.08$ Year 9 13,195.08$ 13% 1,708.10$ 11,486.98$ Year 10 11,486.98$ 13% 1,486.98$ 10,000.00$ Year 11 10,000.00$ 13% 1,294.49$ 8,705.51$ Year 12 8,705.51$ 13% 1,126.92$ 7,578.58$ Year 13 7,578.58$ 13% 981.04$ 6,597.54$ Year 14 6,597.54$ 13% 854.05$ 5,743.49$ Year 15 5,743.49$ 13% 743.49$ 5,000.00$

Year Opening Value Rate Depreciation

Amount Depreciated

Value Opening

Vaue Effective

Life Depreciation

Amount Depreciated

Value Year 1 40,000.00$ 13% 5,177.98$ 34,822.02$ Year 1 40,000.00$ 15 2,333.33$ 37,666.67$ Year 2 34,822.02$ 13% 4,507.69$ 30,314.33$ Year 2 37,666.67$ 15 2,333.33$ 35,333.33$ Year 3 30,314.33$ 13% 3,924.17$ 26,390.16$ Year 3 35,333.33$ 15 2,333.33$ 33,000.00$ Year 4 26,390.16$ 13% 3,416.19$ 22,973.97$ Year 4 33,000.00$ 15 2,333.33$ 30,666.67$ Year 5 22,973.97$ 13% 2,973.97$ 20,000.00$ Year 5 30,666.67$ 15 2,333.33$ 28,333.33$ Year 6 20,000.00$ 13% 2,588.99$ 17,411.01$ Year 6 28,333.33$ 15 2,333.33$ 26,000.00$ Year 7 17,411.01$ 13% 2,253.85$ 15,157.17$ Year 7 26,000.00$ 15 2,333.33$ 23,666.67$ Year 8 15,157.17$ 13% 1,962.09$ 13,195.08$ Year 8 23,666.67$ 15 2,333.33$ 21,333.33$ Year 9 13,195.08$ 13% 1,708.10$ 11,486.98$ Year 9 21,333.33$ 15 2,333.33$ 19,000.00$ Year 10 11,486.98$ 13% 1,486.98$ 10,000.00$ Year 10 19,000.00$ 15 2,333.33$ 16,666.67$ Year 11 10,000.00$ 13% 1,294.49$ 8,705.51$ Year 11 16,666.67$ 15 2,333.33$ 14,333.33$ Year 12 8,705.51$ 13% 1,126.92$ 7,578.58$ Year 12 14,333.33$ 15 2,333.33$ 12,000.00$ Year 13 7,578.58$ 13% 981.04$ 6,597.54$ Year 13 12,000.00$ 15 2,333.33$ 9,666.67$ Year 14 6,597.54$ 13% 854.05$ 5,743.49$ Year 14 9,666.67$ 15 2,333.33$ 7,333.33$ Year 15 5,743.49$ 13% 743.49$ 5,000.00$ Year 15 7,333.33$ 15 2,333.33$ 5,000.00$

Diminishing Value Method Straight Line Method

Comparison of Methods

For this course for the Business Method we will only use Straight

Line Methods

Class Exercise – Depreciate Hilux Ute

Initial Purchase Price $35 000Effective Life 3 YearsSale Price $23 000

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

Calculation Method

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

Bobcat = $40 000

Worked Example

Opening Vaue

Depreciation Amount

Depreciated Value

Year 1 40,000.00$ x (1.5/ 7 ) = 8,571.43$ 31,428.57$ Year 2 31,428.57$ x (1.5/ 7 ) = 6,734.69$ 24,693.88$ Year 3 24,693.88$ x (1.5/ 7 ) = 5,291.55$ 19,402.33$ Year 4 19,402.33$ x (1.5/ 7 ) = 4,157.64$ 15,244.69$ Year 5 15,244.69$ x (1.5/ 7 ) = 3,266.72$ 11,977.97$ Year 6 11,977.97$ x (1.5/ 7 ) = 2,566.71$ 9,411.26$ Year 7 9,411.26$ x (1.5/ 7 ) = 2,016.70$ 7,394.56$

Effective Life

Bobcat = $40 000

Calculation Method

Two Allowable Methods

Prime Cost Method

Asset Cost = Purchase Price

Year 1 $40 000 x (365/365) x (1.5 / 7) = $8571.43

Bobcat = $40 000

Worked ExampleBobcat = $40 000

Opening Vaue

Depreciation Amount

Depreciated Value

Year 1 40,000.00$ x (1/ 7 ) = 5,714.29$ 34,285.71$ Year 2 34,285.71$ x (1/ 7 ) = 4,897.96$ 29,387.76$ Year 3 29,387.76$ x (1/ 7 ) = 4,198.25$ 25,189.50$ Year 4 25,189.50$ x (1/ 7 ) = 3,598.50$ 21,591.00$ Year 5 21,591.00$ x (1/ 7 ) = 3,084.43$ 18,506.57$ Year 6 18,506.57$ x (1/ 7 ) = 2,643.80$ 15,862.78$ Year 7 15,862.78$ x (1/ 7 ) = 2,266.11$ 13,596.67$

Effective Life

Tax Excercise