SMEs warned on 50% investment allowance hire purchase trap

Businesses hoping to take advantage of the special investment allowance using hire purchase arrangements have been warned not to get caught out by the rules covering purchases made under this financing method.

Sue Prestney, principal of accounting firm MGI Melbourne, says the ATO released a special update on hire purchase rules around 10 days ago.

The rules mean that businesses hoping to claim the investment allowance using a hire purchase agreement must have the hire purchase agreement in place at the same time as they put in their order for a new asset.

Prestney is concerned many companies may get caught out by this. She says they may have ordered an asset before 30 June in order to claim the investment allowance, with the intention of sorting out finance some time in the coming months.

But the ATO’s ruling means they risk missing out on the investment allowance.

“You have to have the hire purchase contract as well as supply contract by 30 June,” Prestney says. “Most of the financiers are now aware of this but there are a lot of people who may be caught out.”

Prestney says it is a particular issue for businesses with over $2 million in turnover, who would be hoping to access the 30% investment allowance before 30 June, after which time it goes down to 10%.

She suggests two ways around the problem:

– A chattel mortgage. Under this arrangement, you still buy the asset in your name, then the financier takes security.

-Sale and hire purchase-back. Under this arrangement, you buy equipment in your own name, then sell it to the finance company, who then sells it back to you under a standard hire purchase arrangement. However, you will need to pay for the asset up front in the initial purchase.

If in doubt, Prestney says it’s important to get advice.

“The ATO has taken a fairly hard line on this and it’s just one of those things where you need to be safe.”