03.Cash, lease or loan: the figures
Joe wants a new desktop computer, LCD monitor and printer.
The total cost of the equipment is $1945. He uses it for work purposes three days a week so he can claim 43% of the cost of the equipment over three years in tax deductions. He earns $52,000 per year before tax.
How much will the equipment cost him per year over three years (with tax deductions) if he:
Pays with cash:
- Cost per year before tax: $648
- Cost per year after tax: $561
Joe can claim $278 in tax deductions, reducing his taxable income to $51, 722 and providing a tax saving of $87 per year.
Takes out a $2000 personal loan with a fixed interest rate of 9.4% over three years:
- Cost per year before tax: $748
- Cost per year after tax: $647
Although he can claim $321 in tax deductions, Joe will pay more in this scenario because he has to repay his loan. He makes a tax saving of $101 per year but the interest he pays averages out at about $100 a year over the three-year life of the loan.
Signs a three-year leasing contract which will cost him $22 per week for three years:
- Cost per year before tax: $1144
- Cost per year after tax: $990
Joe can claim $491 per year in tax deductions, giving him a tax saving of $154 but this is still the most expensive option because he's paying $22 per week for the equipment.
NB: This example is for illustrative purposes.
Calculations are based on Joe's marginal tax rate, including the Medicare levy, of 31.5% and on equal depreciation over three years.
We haven't included opportunity costs or loss of interest on cash payments which may be worth considering. By spending your cash upfront you could forgo $50-100 in interest each year after tax.
The scenario doesn't include additional software such as antivirus software or an office suite. Nor does it include insurance or an extended warranty, which may be a good idea if you choose a leasing scheme.
For 'full' business situations, leasing may be a more attractive proposition.
Make sure you seek professional tax advice for your individual situation.