GST changes finance options

In the third of a six-part series on business lending, Mark Beyer looks at the equipment finance market.

THE equipment finance market has witnessed substantial change over the past couple of years, led by the growing popularity of chattel mortgages.

The favourable GST treatment of chattel mortgages has resulted in this financing option becoming more widely used relative to other equipment finance options such as hire purchase, operating leases and finance leases.

Equipment finance is generally used by businesses to purchase plant and equipment used in the business, including cars, trucks, machinery, computer hardware and office furniture.

A major selling point for equipment finance is that businesses can get the equipment they need without tying up large amounts of capital.

It also offers a high degree of flexibility, particularly in terms of repayments, which can be structured to suit the cash flow of the business.

The most appropriate form of equipment finance will depend on many variables unique to each transaction, such as the cost of the equipment, the length of time it is likely to be used and the borrower’s cash flow and tax situation.

The introduction of the Goods and Services Tax (GST) in July 2000 single-handedly made chattel mortgages a more popular option.

A chattel mortgage is treated the same as a loan by the Australian Tax Office and is therefore deemed a financial supply, thereby not attracting GST.

CGA finance director John Richards said chattel mortgages now accounted for about 30 per cent of all equipment finance lending in WA, from less than 5 per cent when the GST was introduced.

The WA market is also characterised by relatively high use of hire purchase relative to leasing pro-ducts.

Hire purchase accounts for 50 to 70 per cent of all equipment financing in WA, according to various market players.

This partly reflects two State Government measures. First, hire pur-chase in WA is still subject to consumer regulation, including a statutory rebate for early termination of contracts. In contrast, borrowers normally have to pay a penalty if a chattel mortgage or leasing contract is paid out early.

Second, there is a 1.8 per cent stamp duty that applies to leasing contracts but there is no stamp duty on hire purchase agreements.

In other States, stamp duty applies to both products at the same, or similar, rates.

The major lenders in WA’s equipment finance market include the five big banks – ANZ (through Esanda), BankWest, Commonwealth, National and Westpac.

Other major lenders include the Japanese firms Orix and UFJ, United States company GE Commercial, and Sydney-based St George Bank and Macquarie Leasing.

In addition, a number of auto and equipment manufacturers have their own finance arm.

BankWest regional sales manager, business asset finance, Ray Pickersgill, said key drivers of competition in the market were service levels and pricing.

“Most people need a quick turn-around on their application, so they are looking for banks that can give them a fast response,” he said.

“They are also looking for consistent decisions, so they can under-stand the banks’ approach.”

A feature of the equipment finance market is the prominent role played by finance brokers (see table).

The services and capabilities of the brokers are highly varied. The larger operators can advise and package a broad range of debt pro-ducts, from equipment finance to term loans and property loans.

Orix State manager, fleet and financial services, James Barron, said some brokers had effectively taken on a “mini treasury” role for their clients, providing ongoing advice on financial management rather than simply being transaction driven.

Mr Barron has observed big growth in truck leasing, particularly by companies that previously had bought trucks outright or had used hire purchase, which is perceived as being close to ownership.

In contrast, larger companies have always favoured operating leases, so that the assets are off their balance sheet and they have the certainty of fixed payments.

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