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Once in a generation financial incentives

Mark O’Donoghue, Finlease Founder and CEO, speaks with Cranes and Lifting about how growing businesses can capitalise on the Federal Government’s unprecedented financial incentives.

In the October 6th, 2020 budget the government announced a number of incentive programs providing a once in a lifetime opportunity for private enterprise to seize the day, expand their businesses under the umbrella of very significant cashflow support provided by the government over the next 18 months and beyond.

“As serial optimists, we can see substantially improving circumstances for so many industries, including those who have remained buoyant through the last 12 months due to infrastructural or civil based activity,” he says.

Finlease, which was founded by O’Donoghue in the 1980s and has since grown into a team of 70, provides over $500 million in equipment finance each year.

“We arrange equipment finance for business owners all around the country, with many clients that have been with us for over 20 years,” O’Donoghue says.

“We finance everything from a single motor vehicle or piece of equipment, through to millions of dollars’ worth or machinery or property.”

Sourcing finance from a range of 20 capable and competitive institutions enables Finlease to spread loans across a number of lenders, ensuring business owners are not tied to just one bank that has them locked up with all securities.

“Equipment finance allows companies to spread a greater portion of the overall debt to a broader base of financiers, which means less exposure to their existing bank, greater competition between financiers to drive lower interest rates, often better approval conditions and a broader base of competitive lenders to assist in financing future growth,” O’Donoghue says.

Forward thinking finance

Despite the challenges of 2020, O’Donoghue expresses optimism about the current financial and business landscape. He adds that as COVID transitions from a here and now reality into a historical fact, mainstream financers are looking at the present and future landscape for clients when looking to approve finance.

“The combination of improving employment numbers, significant government project spend and tax incentives, as well as the desire of Australians to emerge from the COVID hibernation, bodes well for 2021 and beyond,” O’Donoghue says.

While the Federal Budget’s support for businesses is far-reaching, O’Donoghue notes two key incentives. First, the October 2020 budget enables businesses to deduct the full cost of eligible capital assets acquired from 6 October 2020 and first used or installed by 30 June 2022.

Additionally, the government will allow eligible companies to carry back tax losses from the 2019-20, 2020-21- or 2021-22-income years to offset previously taxed profits in 2018-19 or later years.

“These government incentives are once in a generation – this is significant,” O’Donoghue says.

“If good profitable businesses are thinking about expanding and undertake that expansion before the 30th of June 2022, the tax breaks they can obtain through the 100 per cent write-off are mind-bending.”

O’Donoghue, who is committed to expressing financial environments in ‘plain speak’, outlines a hypothetical example of how crane hire companies can capitalise on these incentives.

“Barry owns AAA Crane Hire Pty Ltd, which has an annual turnover of $8 million,” he explains.

“Over the years, Barry has bought many cranes as well as other support equipment, and has depreciated all of those assets using the simplified depreciation pool – claiming 30 per cent diminishing value depreciation each year. The closing balance on this depreciation pool as of 30 June 2020 was $3 million.

“Despite the challenges of the COVID environment, AAA has had a busy year, resulting in a trading profit of $1 million for the year ended 30 June 2021.”

According to O’Donoghue, this result would usually have created a tax bill of $260,000, however under new tax incentives, Barry has an option to claim 100 per cent full expensing of the entire depreciation pool balance of $3 million, equalling the total written down value of all cranes and support equipment.

“This one off tax incentive allows AAA to show an actual loss for tax purposes of $2 million in 2021,” O’Donoghue says.

“Not only does this mean that AAA will not have to pay the $260,000 tax bill for 2021, but Barry will also be able to ‘carry back’ the $2 million tax loss on any tax AAA may have paid on profits for the prior two financial years.

“As AAA did in fact make profits of $1 million in both the 2019 and 2020 financial years, the temporary loss carry back incentive provides the opportunity for the total tax paid of $550,000 for those two years to be repaid as a refund once AAA has concluded their 2021 Tax Return,” he said.

Translation and advocacy

O’Donoghue explains that while the financial eco-system can appear complex, for businesses looking to capitalises on government incentives, planning ahead is critical.

He adds that it’s important to seek finance approvals early and ask for more than is initially needed as an upper limit, as finance approvals do not incur a cost and do not need to be used. Having existing finance approvals in place also allows businesses to act quickly when opportunity arises.

Finally, O’Donoghue suggests that businesses work with professionals who specialise in equipment finance, as they have the experience to negotiate the right outcome and have access to the broadest lending market.

“We’ve built our business by looking after clients long-term. We’re a small business like our clients, and because we spend all day looking at companies, we understand what they do and provide good advice and alternatives,” he says.

To advocate for its clients, Finlease will work with two or three of the various capable lenders, who will in effect be competing for their client’s business.

“Then we’ll analyse what these lenders are offering and recommend the best outcome,” O’Donoghue says.

“The trick is to know when the terms are fair relative to what the market is offering, or whether they need to be adjusted slightly. It may be as simple as wanting a longer term or a higher residual, or perhaps a lender is insisting on a deposit when others would approve 100 per cent finance.

“At our core, we’re committed to negotiating better outcomes for our clients and looking after them for the next 20 years,” he said.

 

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