Equipment Finance Tax Benefits: Maximise Your Deductions

Financing business equipment in Australia is not just about spreading the cost — it is also about maximising your tax deductions. The way you structure your equipment finance can have a significant impact on your tax position, cash flow, and overall cost of ownership. This guide explains the key tax benefits available when financing equipment and how to structure your arrangements to get the most value.

Tax Deductible Interest

When you finance business equipment through a chattel mortgage, hire purchase, or business loan, the interest component of your repayments is tax deductible as a business expense. This applies to all equipment finance structures where the business is the borrower. For example, if you finance a $100,000 piece of machinery at 7 per cent over five years, you will pay approximately $18,830 in total interest. This entire amount is deductible over the life of the loan, reducing your taxable income by $18,830 over five years. The timing of the interest deduction depends on your accounting method. Cash basis taxpayers deduct interest in the year it is paid, while accrual basis taxpayers deduct it in the year it is incurred. Most small businesses use cash basis accounting.

Depreciation Deductions

When you own business equipment (or are treated as the owner for tax purposes), you can claim depreciation deductions over the effective life of the asset. The ATO publishes effective life determinations for most types of business assets. For example, a CNC milling machine has an ATO-determined effective life of 10 years, a commercial refrigerator has an effective life of 12 years, and a laptop computer has an effective life of 4 years. You can choose to depreciate over the ATO effective life or use the simplified depreciation rules if you are a small business. Under the simplified depreciation rules for small businesses (turnover under $10 million), assets costing less than $20,000 can be immediately deducted (the instant asset write-off), while assets costing $20,000 or more are placed in a general small business pool and depreciated at 15 per cent in the first year and 30 per cent in subsequent years.

Instant Asset Write-Off

As detailed in our dedicated guide, the instant asset write-off allows small businesses to immediately deduct the full cost of eligible depreciating assets costing less than $20,000 each. This is one of the most powerful tax benefits available because it brings forward the entire deduction into a single year, rather than spreading it over the asset's effective life. The key points to remember are that the threshold is per asset (not total), the asset must be first used or installed ready for use in the income year, the business must have an aggregated turnover under $10 million, and the car cost limit applies to passenger vehicles. When combined with equipment finance, the instant asset write-off allows you to finance the purchase (preserving your cash) while still claiming the full cost as a tax deduction in year one. This is a powerful combination for businesses that want to invest in growth without depleting their working capital.

GST Credits

If your business is registered for GST, you can claim a GST credit (input tax credit) for the GST included in the purchase price of business equipment. On a $110,000 piece of equipment (including $10,000 GST), you claim the $10,000 GST credit on your next BAS return, effectively reducing the net cost to $100,000. When you finance equipment through a chattel mortgage, you can claim the GST credit upfront — that is, in the BAS period when you acquire the asset — even though you are paying for the asset over time through the finance arrangement. This provides an immediate cash flow benefit. For hire purchase and leasing arrangements, the GST treatment differs. Under a hire purchase, the GST credit is typically claimed upfront. Under a lease, GST is claimed progressively on each lease payment.

Finance Structure Comparison

Chattel Mortgage

Under a chattel mortgage, you own the asset from day one. You can claim depreciation (or the instant asset write-off), deduct the interest component of repayments, and claim the full GST credit upfront. This is the most common structure for businesses seeking maximum tax deductions.

Hire Purchase

A hire purchase is similar to a chattel mortgage in that you are treated as the owner for tax purposes. You can claim depreciation, deduct interest, and typically claim the GST credit upfront. The main difference is in the legal structure — under hire purchase, you do not take legal ownership until the final payment is made.

Finance Lease

Under a finance lease, the lessor retains ownership of the asset, but the lessee is typically treated as the owner for tax purposes. Depreciation and GST treatment can vary depending on the specific lease terms. Finance leases are less common for small businesses but are used for larger capital items.

Operating Lease (Rental)

Under an operating lease, the lessor retains ownership and the lessee claims the lease payments as a deductible expense. There is no depreciation claim because the lessee does not own the asset. GST is claimed progressively on each lease payment. Operating leases are useful when you want to use equipment for a defined period without the commitment of ownership.

Maximising Your Tax Benefit: A Practical Example

Consider a building company that needs to purchase a $45,000 excavator. Under a chattel mortgage at 7.5 per cent over four years: The full $45,000 cost can be placed in the small business depreciation pool (since it exceeds the $20,000 instant write-off threshold). In year one, the depreciation deduction is $6,750 (15 per cent of $45,000). In subsequent years, the deduction is 30 per cent of the remaining pool balance. The interest deduction over four years is approximately $7,200. The GST credit of $4,091 is claimed upfront on the next BAS return. The total tax deductions over the life of the finance arrangement are $52,200 (cost plus interest), though the timing of the deductions is spread across the loan term. If the excavator costs $18,000 instead (under the $20,000 threshold), the entire cost is immediately deductible in year one, providing an upfront tax deduction of $18,000 plus the interest deductions over the loan term.

Getting the Structure Right

The optimal finance structure depends on your business type, turnover, GST registration status, and tax position. What works for a sole trader on a lower tax bracket may not be optimal for a company on the 25 per cent corporate rate. We strongly recommend consulting your accountant before committing to an equipment finance arrangement, so the structure is tailored to maximise your specific tax benefit. Once you know the right structure, our finance team can source the most competitive rate from our lender panel and manage the application process from start to settlement.