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Current Activity and Prospects
The Australian equipment finance market continued to experience robust conditions in 2007-2008. Strong business levels have been a feature of the Industry since the early 1990s, apart from a temporary hiatus during the period of the introduction of GST in 2000.
The trends in this broad mix are not only affected by economic conditions but also by Government policy, with the latter particularly evident in recent times. The introduction of GST produced a significant shift away from finance leases and initially to hire purchase, as the transitional GST arrangements did not apply to hire purchase. This trend has been followed by a move away from hire purchase to chattel mortgage and leasing, caused by an inappropriate GST outcome in relation to hire purchase contracts entered into by cash basis taxpayers. As from 1 January 2005, the Commissioner of Taxation’s revised effective life determinations for trucks and like assets has translated into unrealistically high ‘safeharbour’ residual values in leases for these assets, resulting in a shift away from leasing to the provision of hire purchase and chattel mortgage products for these transactions. As detailed in this Review, these tax issues are the subject of ongoing discussions with Treasury and the Tax Office, and have been raised in AELA’s submissions to the Board of Taxation GST Review and the Henry AFTS Review; we are hopeful of a sensible resolution. Besides GST and income tax, differences between the States in the scope and rate of stamp duty have caused distortions in the product mix. However, as also outlined elsewhere in this Review all jurisdictions have now largely abolished these duties, and accordingly it is pleasing to report that in the not too distant future, stamp duty distortions will no longer exist in the equipment finance market.
The impact of these influences on the composition of equipment finance business has been quite dramatic. Since 2000 total lease business has declined from 60% to around 40%, hire purchase has declined from 40% to 20%, and from very little chattel mortgage business only five year ago it now makes up 40% of the total.
The ABS provides a break-down of the broad asset classes only for leasing; of the total, motor related business accounts for 51%, general equipment for 41% and other transport equipment for the remainder. Within the leasing for motor category, 66% is new cars, 15% new trucks, 13% used cars and 4% used trucks. The trend over recent years has been for new vehicle leasing to expand at the expense of used vehicles. For non-motor leasing, EDP equipment makes up 32%, agricultural and other heavy equipment 24%, and office machines 15%. test test test
Equipment finance is provided to the broad range of Australian industry sectors. No one industry sector particularly dominates; the single largest are the Property and Business Services sector together with Finance and Insurance, accounting for 14% and 18% respectively. On a State/Territory basis, NSW accounts for 43%, Victoria for 23% and Queensland for 17%, so that the three eastern states and ACT made up 83% of total business. The WA economy has been very strong over the recent period, and this State accounts for a further 9% of business.
Until the September Quarter 2008, the Australian economy had experienced an extended period of expansion from the early 1990s. Since 2002, the rise in commodity prices increased Australia’s terms of trade by some 70%. However, as substantial domestic supply constraints emerged and the inflation rate rose above the Reserve Bank’s target of 2-3%, from late 2001 official interest rates increased 13 times over the 7 years from a low of 4.25% to 7.25% in August 2008. With negligible GDP growth in the September Quarter coinciding with a series of global financial crises and dislocated funding markets, monetary policy has been rapidly eased such that the official rate has been reduced 4 times in 4 months to 4.25% in late December. Fiscal policy has also been significantly eased with a $10.4 billion consumption stimulus announced mid-October to commence 8 December and a 10% Investment Allowance for expenditure on plant and equipment over $10,000 contracted for between 13 December and 30 June 2009. These major positive domestic policy responses have however to be weighed against the local impacts of unprecedented disruptions to global financial markets and international economic slowdowns. At the time of the Review, the outlook for the Australian economy, capital investment and equipment financing remained uncertain, although the starting points of Budget surplus and firm interest rates, give some optimism that fiscal and monetary policies can continue to be applied to minimise any economic slowdown.
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