Investing in equipment is one of the most common ways Australian businesses grow, improve productivity, and stay competitive. What many business owners do not realise is that the way you finance equipment can have a significant impact on your tax position. From the instant asset write-off to depreciation strategies and GST input credits, understanding the tax benefits of equipment finance can help you make smarter decisions and keep more money in your business.
The Instant Asset Write-Off
The instant asset write-off is one of the most valuable tax incentives available to Australian businesses. It allows eligible businesses to deduct the full cost of an asset in the financial year it is first used or installed ready for use, rather than depreciating it over several years.
Current Thresholds and Eligibility
The Australian Government has extended and adjusted the instant asset write-off provisions multiple times in recent years. For the 2025-26 financial year, eligible small businesses with an aggregated turnover of less than $10 million can instantly write off assets costing less than $20,000 each. For assets above this threshold, or for businesses with higher turnover, the temporary full expensing provisions may apply, though these are subject to legislative changes. Always check the latest ATO guidance or speak with your accountant for the most current thresholds.
It is important to note that the asset must be first used, or installed ready for use, within the relevant financial year. Simply ordering or paying a deposit is not enough; the asset must be in use.
How It Works with Financed Assets
A common misconception is that you need to pay cash for an asset to claim the instant asset write-off. This is not the case. If you finance the asset through a chattel mortgage or commercial hire purchase, you can still claim the full write-off because you own the asset from the start of the agreement.
However, if you use a finance lease, the tax treatment differs because the financier, not your business, is the legal owner of the asset. Under a finance lease, you generally cannot claim the instant asset write-off or depreciation directly. Instead, the lease payments themselves are tax-deductible.
Depreciation Methods
When the instant asset write-off does not apply, whether because the asset exceeds the threshold or your business is not eligible, depreciation becomes the primary method for claiming tax deductions on equipment.
Diminishing Value Method
Under the diminishing value method, you claim a larger deduction in the earlier years of the asset's life, with the deduction decreasing each year. This method is advantageous if you want to maximise your deductions upfront. The formula is: base value multiplied by (days held divided by 365) multiplied by (200% divided by the asset's effective life).
Prime Cost Method
The prime cost method spreads the deduction evenly over the asset's effective life. While you do not get the benefit of larger early deductions, it provides a consistent and predictable deduction each year. The formula is: asset cost multiplied by (days held divided by 365) multiplied by (100% divided by the asset's effective life).
Choosing the Right Method
The best depreciation method depends on your business circumstances. If your business is currently in a high-income period and you want to reduce your taxable income now, the diminishing value method is generally preferable. If you prefer stable and predictable deductions, the prime cost method may be more suitable. Once you choose a method for a particular asset, you cannot switch.
GST Input Tax Credits
If your business is registered for GST, you can claim input tax credits for the GST included in the price of business equipment. How and when you claim this credit depends on your finance structure.
Chattel Mortgage and Hire Purchase
With a chattel mortgage or commercial hire purchase, you can claim the full GST credit on the purchase price of the asset in your next BAS return after settlement. For a $110,000 piece of equipment (GST inclusive), that means a $10,000 GST credit, which is a substantial cash flow boost early in the arrangement.
Finance Lease
Under a finance lease, GST is included in each lease payment. You claim the GST component of each payment as an input tax credit in the BAS period it falls due. While this means smaller, ongoing credits rather than one large upfront claim, it also means you do not need to finance the GST component of the purchase price.
How Finance Structure Impacts Your Tax Position
The choice of finance product directly affects which tax benefits you can access. Here is a summary of how the main structures compare:
- Chattel Mortgage: Claim the instant asset write-off (if eligible), depreciation, GST upfront, and interest deductions. Best for businesses wanting maximum upfront tax benefits.
- Commercial Hire Purchase: Similar to a chattel mortgage in terms of tax treatment. Ownership transfers at the end of the term, and you can claim depreciation and the instant asset write-off.
- Finance Lease: Lease payments are fully deductible as an operating expense. GST is claimed progressively. No depreciation claim. Suits businesses that prefer simplicity or want to keep assets off their balance sheet.
- Operating Lease: Payments are fully deductible. No depreciation. The asset is returned at the end of the term. Best for short-term needs or rapidly depreciating technology.
ATO Considerations for 2026
The ATO continues to closely monitor how businesses claim deductions on financed assets. Here are key considerations for the 2025-26 financial year:
- Substantiation: Ensure you have proper records for all equipment purchases, including tax invoices, finance contracts, and evidence that the asset is used for business purposes. The ATO can disallow deductions if adequate records are not maintained.
- Private use adjustments: If equipment is used partly for private purposes, you must apportion your deductions accordingly. This is particularly relevant for vehicles, which often have a private use component.
- Instant asset write-off timing: The asset must be installed and ready for use before 30 June to qualify for a write-off in the current financial year. Plan your purchases and delivery timelines accordingly.
- Division 7A considerations: If your business operates through a company and a director or shareholder uses a company-owned asset for private purposes, Division 7A of the Income Tax Assessment Act may apply. This can create a deemed dividend and unexpected tax liability.
- Legislative changes: The instant asset write-off thresholds and eligibility criteria have changed several times in recent years. Monitor the ATO website and the Federal Budget announcements for any changes that may affect your planning.
Practical Tips to Maximise Your Tax Benefits
- Plan the timing of purchases: Acquiring and installing equipment before 30 June allows you to claim deductions in the current financial year. Do not rush a purchase solely for the tax benefit, but if you are planning an acquisition, timing can make a difference.
- Choose the right finance structure: Work with your broker and accountant to select a structure that aligns with your tax strategy. A chattel mortgage maximises upfront deductions, while a finance lease simplifies ongoing tax treatment.
- Keep detailed records: Maintain logbooks for vehicles, track business use percentages for shared equipment, and retain all invoices and contracts.
- Review your position annually: Your optimal tax strategy may change as your business grows. What worked last year may not be the best approach this year.
- Get professional advice: Tax law is complex and changes frequently. Always consult your accountant or tax adviser before making major equipment finance decisions.
Get Started with Equipment Finance
Understanding the tax benefits of equipment finance is an important part of making smart business decisions. At Shielded Finance, we help Australian businesses access competitive equipment finance through our panel of over 30 lenders. Whether you need a chattel mortgage, finance lease, or commercial hire purchase, our brokers will help you find the right structure for your business and tax position. Apply online today or get in touch for a free consultation.