With the instant asset write-off scheme being modified by the Federal Government and a new financial year commencing, one might think there would be a cooling-off phase in the crane sector. Jeff Wilson, Senior Partner with Finlease doesn’t see it this way.
“After the end of the financial year, you would expect that a lot of businesses had taken advantage of the instant asset write-off and had bought forward their purchases to maximise the tax incentives that were on offer.
“Now that we are into the new financial year and we’ve been through the winter school holiday period, people have taken time to catch their breath, consolidate and regroup on what was a very big year for a lot of businesses in general. Many crane companies have come to the realisation that the work is still there more than ever,” said Jeff.
“We are now seeing the impact of those companies that did shut their doors last financial year, companies are realising there’s still all of this work out there and this means more cranes are needed”.
“Because of the business closures there are more staff out there, but the labour shortage is still real. If we took away the media and the rhetoric about interest rate rises, home loan pressures, I think Australia is in a very good position. Yes, there are some sectors that are hurting, but overall, the feedback we get from business owners is upbeat” he said.
Jeff doesn’t think there is going to be a negative rebound with the instant asset write-off finishing.
“For the companies that have ordered new cranes which are going to be arriving in the next three, six, or 12 months, because of the projected amount of work across the country, the industry is going to need these cranes,” he said.
“If new cranes aren’t available, people are still looking at the secondhand market.”
“Post instant asset write off, we’re starting to see a change in the way that the cranes are being financed. Before June 30, most owners were financing cranes as chattel mortgages because that’s how they got their maximum tax deductions out of it.
“Today, depending on the size of the business, it may be that we need to rethink about how this is done and consider financing future cranes under a method called Finance Leasing,” said Jeff.
Finlease has prepared the following examples. With the window for the 100 per cent depreciation tax incentive having now been reduced to $20,000 assets from July 1, 2023, is a chattel mortgage still the right structure for financing equipment?
The answer depends on the size of your company.
For organisations with an annual turnover of less than $10 million, Chattel Mortgage is still seen as the preferred structure, especially if your organisation has entered the Simplified Tax System – where all relevant assets acquired after July 1, 2023, can be placed into a Depreciation Pool.
Under this structure, relevant assets can be appreciated at 30 per cent diminishing value (15 per cent for the initial year, as the asset has not been held for the full 12 months).
For organisations with an annual turnover greater than $10 million, any asset acquired after July 1, 2023, will be subject to the usual depreciation allowances available under the Effective Life categorisation provided by the ATO.
By way of example, if an asset is deemed by the ATO to have an effective life of 10 years, the annual depreciation allowance will be 10 per cent of its Prime Cost, or 20 per cent Diminishing Value.
Is a Finance Lease a better option for these larger (greater than $10 million turnover) companies?
As an alternative for those larger organisations, we expect to see a return to some assets being financed under a Finance Lease, where the actual lease payment is claimed as the deduction, provided the lease structure (term and residual) fits ATO guidelines.
As an example, where an excavator has an effective life of 10 years, the depreciation claimed after five years may be as little as 50 per cent, whereas under a finance lease (funding the asset over a five-year term with a 25 per cent residual), the lease has allowed the client to claim deductions (via the lease payments) for 75 per cent of the asset value. (Always seek advice from your accountant as to the correct structure.)
There is no doubt that the 2024 financial year and beyond is a very different landscape to the COVID-19-induced tax incentives of the past few years. Companies should speak with their brokers and accountants to ensure they structure their future equipment debt in the most appropriate tax effective manner.
Jeff thinks the transitioning period for the industry hasn’t finished just yet and we can expect to see more changes in the coming 12 to 36 months.
“As a result of companies closing, other companies are continuing to weigh up their options. Larger businesses continue to grow and the feeling is smaller businesses continue to fill the “smaller niche” markets with less competition,” said Jeff.
Jeff is always a good barometer for how the various states are travelling. He has many high-level conversations with crane hire businesses about future investments. He is bullish about the foreseeable future.
“I think every state is still optimistic about its future. It will be interesting to see what happens in Victoria with the Commonwealth Games being abandoned and the massive infrastructure projects running well over budget. That being said, the projects need to be completed and the state government will have to see these projects through to completion.
“The renewables sector is really moving, so there should be plenty of work nationally for those crane owners who do work in this space.”
“Queensland with its resources activities and with the Olympics coming online is going to remain a busy state. Western Australia continues to do what Western Australia does and the mining sector there is still strong,” said Jeff.