Using Equipment Finance To Maximise Instant Asset Write‑Off And Beyond

For Australian businesses, the tax rules around equipment have shifted fast: instant asset write‑off limits have moved, temporary full expensing has ended, and we’re largely back to more traditional depreciation.

The core rule hasn’t changed: you usually claim deductions based on the asset’s cost and effective life, not on how you financed it. The tax law cares about what you bought, when and how you use it; lenders care about how you’ll repay the debt. Get the two working together and you can upgrade gear, manage cashflow and keep the ATO happy.

This guide gives you a decision‑grade overview you can use with your accountant and broker this week.

Tax deductions follow the asset, not the loan structure.

1. The three big concepts: write‑off, full expensing and depreciation

1.1 Instant asset write‑off – what it actually means

Instant asset write‑off lets eligible small businesses immediately deduct the business portion of the cost of certain depreciating assets up to a cap, instead of claiming depreciation over several years.

Key points (check current year rules on the ATO site):

1. It applies per‑asset, not per‑business.
2. The asset must be first used or installed ready for use in the relevant period.
3. It’s only for eligible small business entities (aggregated turnover thresholds apply).
4. There is a dollar cap per asset (which has changed many times).

Financing doesn’t disqualify you. You can still use instant asset write‑off on equipment funded by a chattel mortgage, hire purchase or secured business loan if you:

• are the economic owner of the asset; and
• use it primarily for business (or apportion if mixed use).

1.2 Temporary full expensing – the COVID era boost

Temporary full expensing (TFE) allowed many businesses to deduct the full cost of eligible depreciating assets with no (or very high) caps for assets acquired and first used between 6 October 2020 and 30 June 2023.

In practice, for those years:

• Most businesses simply expensed 100% of eligible equipment in the year of purchase.
• Financing structure mostly affected GST and timing, not the size of the deduction.

TFE has now ended, but you’ll still see it on prior‑year tax returns and in your accountant’s advice for assets bought in that window.

1.3 We’re back to “normal” depreciation (mostly)

With TFE gone and instant asset write‑off much tighter, most larger equipment purchases are now depreciated over effective life using:

• Small business simplified depreciation pool; or
• General depreciation rules (prime cost or diminishing value).

So the practical questions now are:

• Should you chase an instant write‑off this year, or accept multi‑year depreciation?
• What loan term best matches the tax profile and asset life?

We’ll walk through that with numbers shortly.

2. Does financing change your tax deduction? The short answer

For most structures, the total deduction over the asset’s life is broadly similar whether you pay cash or use finance. What changes is timing and type of deduction.

2.1 The general rule

For a typical small business using a chattel mortgage or hire purchase:

• You can claim:
  • depreciation (or write‑off/full expensing where eligible) on the cost of the asset; plus
  • interest on the loan; plus
  • running costs (fuel, servicing, insurance) to the business‑use percentage.
• You cannot deduct the principal repayments themselves.

For a finance lease:

• You generally deduct the lease rentals as operating expenses; and
• You usually can’t claim depreciation because you’re not treated as the owner.

(There are exceptions and edge cases, which is why your accountant should always sign off.)

2.2 Why timing matters more than structure

Because total tax over the life of the asset is often similar, your real levers are:

• Timing of the deduction (now vs spread out).
• Timing of GST credits (upfront vs over payments).
• Cashflow impact of repayments.

That’s where aligning your equipment finance with tax rules really pays off.

For a deeper comparison of structures, see Choosing Between Chattel Mortgage, Lease and Hire Purchase.

3. Worked example: $80,000 financed equipment, step‑by‑step

Let’s look at a simple, realistic example to make this concrete.

Scenario

• Small business (turnover $1.2m), GST registered.
• Buys an $80,000 (incl GST) excavator, 100% business use.
• Uses a 5‑year chattel mortgage at 8.5% p.a. interest, no balloon.
• Assumes current rules mean no instant write‑off for this asset (over the cap), so it’s depreciated.

3.1 Numbers on the finance

Approximate monthly repayment on $80,000 over five years at 8.5%:

• Monthly repayment ≈ $1,640 (principal and interest).
• Total repayments over 5 years ≈ $98,400.
• Total interest over term ≈ $18,400.

(Your actual rate and repayments will vary by lender and credit profile.)

3.2 Tax treatment – no instant write‑off

Assume general depreciation, diminishing value, effective life 8 years (illustrative only):

• Depreciation rate (DV) ≈ 25% per year.

Year 1 (asset used full year):

• Depreciation deduction: 25% × $80,000 = $20,000.
• Interest deduction: roughly $6,000 in year 1 (interest is front‑loaded).
• Total deduction: about $26,000.

Year 2:

• Depreciation base: $60,000.
• Depreciation: 25% × $60,000 = $15,000.
• Interest: maybe $4,800.
• Total deduction: about $19,800.

And so on until the asset is fully depreciated or disposed.

3.3 What if instant asset write‑off applied?

If, in a year where rules allowed it, the excavator qualified for a full instant write‑off:

• Year 1 depreciation: full $80,000.
• Plus interest deduction of around $6,000.
• Total Year 1 deduction: approx $86,000.

Over 8 years, the total deduction is similar. You’re just pulling a big chunk forward.

3.4 Why this matters in real decisions

A full write‑off can:

• Drop your taxable income sharply in that year.
• Reduce tax and possibly help with cashflow, especially if you’re on the 30% company tax rate.

But you need to sanity‑check:

• Are you already in a low‑profit year (so the deduction is wasted at a low tax rate)?
• Will a massive deduction this year make next year’s result look artificially strong to lenders?

If you’re planning more borrowing soon – say for a property purchase – smoothing depreciation instead of maxing write‑off may help show more stable profits.