CASE STUDY

Hills Realty* are a real estate franchise with branches located through the Eastern Seaboard of Australia. A key part of Hills Realty marketing strategy is the distribution of pamphlets to regional centres. Hills Realty were seeking a Pressure Seal Paper folding unit that would be capable of folding a large number of One Piece Mailers. They contacted Futurepay and enquired about Futurepays access to such equipment, and a financial solution to reduce their capital outlay. Futurepay sourced a Welltec Postmate 6 folding machine via its relationship with a premium supplier. The Postmate 6 has a RRP of $15,996. Hills Realty had the option to purchase the unit outright (Option A) or rent/lease the unit (Option B).

Option A:

If Hills Realty decide to purchase the unit outright, the costs would be as follows:

Postmate 6 $15,996

Freight $200

Installation Costs $200

On an annual basis, Hills Realty would need to depreciate the Postmate 6 in its accounts. Assuming 8 years straight line depreciation the depreciation expense would be $2,000 per year.

The Depreciation Expense will lower the annual net profit of Hills Realty, and thus reduce their income tax by approximately $600 p.a. (assuming a 30% income tax rate multiplied by $2,000 Depreciation Expense). On an ongoing basis, if the Postmate 6 requires a service, Hills Realty will have to call the supplier directly to organise. This will add additional cost of around $200 each time.

The costs of Option A includes: 

  • Capital outlay at Day 1 of $15,996 which could have been used for other working capital purposes
  • If Hills Realty wish to upgrade they will have to go and purchase another new unit
  • Ongoing accounting entries with depreciation expense being recorded on a monthly/annual basis
  • Postmate 6 is capitalised on the balance sheet therefore no immediate taxation benefit
  • Maintenance & repairs to be organised by Hills Realty and ongoing costs to be expensed

The benefits of Option A include: 

  • Full ownership of Postmate 6 at Day 1
  • Single accounting entry for purchase of Postmate 6

Option B:

Hills Realty decide to enter a 3 year rental contract with Futurepay. The weekly cost of the Postmate 6 is $180, which includes full service and maintenance for the life of the rental. It also includes delivery charges. There is a one off application fee of $199 which also applies.

Capital Outlay $199 one off application fee + $180 per week.

There is no need for a large capital outlay at Day 1. At the end of the financial year, the annual taxation benefit would be approximately $2,808 (assuming 30% income tax rate). There are no further accounting entries required, as all maintenance/servicing and delivery costs are included in the weekly rental. 

The costs of Option B include: 

  • Hills Realty will not own the equipment from Day 1. There may be an option for Hills Realty to purchase the equipment at the end of the rental term 

The benefits of Option B include: 

  • No initial capital outlay to purchase the equipment
  • The Postmate 6 can immediately start working on their advertising campaign and generate income to pay for itself on a monthly basis
  • Taxation benefits from expensing the rental cost
  • Simple accounting with one non variable rental cost per month
  • No ongoing service charges. All that is required is for Hills Realty to contact Futurepay and Futurepay will organise a service representative. This can be organised across any of the Hills Realty branches in the Eastern Seaboard
  • Option for Hills Realty to upgrade the equipment at any time during the rental contract

* Hills Realty is not an existing business and the name is used for case study purposes only. Futurepay do not provide legal or accounting advice. The above calculations are for demonstrative purposes only. Please consult your accountant or financial adviser for advice regarding the taxation/accounting treatment for rental/leases.

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