Machinery and Equipment Finance – lease or buy?
It’s the age old question and the answer is – it depends!
From a cashflow point of view leasing gives you a managed expense, with nothing up front, you know it’s going to be x amount per month and can include full maintenance which is great for large enterprises and fleet management and then hand it back in say 3 years, you don’t have to worry about pricing at disposal and seamlessly replace it with a new one at current pricing and in some cases you can opt to purchase the asset off lease at maturity. You are however locked in for the full term and to get out of it you have to virtually pay out the whole value of the contract which is not ideal if your needs change as can happen in SME’s, nor can you modify it and are charged for excessive wear and tear at maturity.
Purchasing on the other hand, gives you more flexibility but comes with less certainty. You can often finance with no deposit and can add the GST claimed into the schedule in the third month thereby reducing payments and also in some cases structure seasonal payments to suit covering interest only in the off season and with some companies right down to zero which can be great for cash flow management. Structuring can also include having a ballon payment at the end, you can even in some cases opt for quarterly and annual payments although it needs to be mitigated with strong financial reasoning.
Tax wise there are two main treatments. OFF balance sheet for leases meaning you claim the GST on each lease payment and the GST free component as an operating expense on your P&L like buying fuel and ON balance sheet for purchases meaning you claim the GST up front and depreciate it, you do however have to pay the GST back at disposal albeit at the then market rate.
The current Govt Investment Boost incentive also allows for a further 20% depreciation up front on new equipment.
Accounting standards being what they are can allow for some leases to be considered on balance sheet and the IRD has an opinion on useful life of an asset for leasing purposes factoring things like wear and tear, exhaustion, obsolescence and normal maintenance resulting in finance companies structuring their lease terms accordingly, your accountant is your source of truth for any tax matters.
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