With load-shedding rearing its ugly head once again and the chronic unreliability of South Africa’s power supply, buying a generator is a serious consideration for many South African businesses. Many will, without question, opt for the lowest discount rate option usually offered on an Instalment Sale through commercial banks. However, the advantage of an asset rental or rent-to-own option over your standard instalment sale agreement lies in the ability to accelerate the asset write down and subsequent tax deductions on your balance sheet.
Simply put, if you buy an asset using cash or through an instalment sale, that asset will stay on your balance sheet for the entirety of its write-off period as set out by The Schedule of Wear and Tear/ Depreciation Allowances issued by SARS.
For example, the full acquisition cost of a standby generator qualifies for a 15-year write-off period while a portable generator is a 5-year write-down. These are important factors to be considered when presented with a “Buy vs Lease” decision. As shown in the below example, financing this equipment on a rental basis would yield the highest Net Present Value when compared to cash or ISA option, even when using a higher discount rate for the rental option.
Thus, opting for an operating lease allows you the opportunity to accelerate your income tax claims and improve your cost of acquisition; allowing your business to realise the real benefits of financing your assets
The best option would be to finance the Generators on a rental basis as the NPV under option 3 is higher (less negative) than Option 1 and 2
Furthermore, Option 1 has no spare cash to invest and the NPV will further be affected due to the opportunity cost of capital. However, with the financing option, cash will be available to generate a positive return on investment (inflow).
Wear-And-Tear or Depreciation Allowances by SARS: https://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-IN-2012-47%20-%20Wear%20And%20Tear%20Depreciation%20Allowance.pdf