The process of calculating taxes and figuring out the maximum benefit through alternative investments can get complicated, right? Depending on the size of an AIF (Alternative Investment Funds), the terms and conditions of the lease agreement, the category to which a particular AIF belongs and the rules of taxation vary vastly. The following article discusses the basics of alternative investments while focusing on asset leasing and the taxation processes of such investments for investors and businesses in order to weigh out their options and decide on a secure investment accordingly.
What are Alternative Investments?
Alternate investments are essentially forms of investments that do not include the traditional forms of investments such as stocks, cash or bonds. Alternate investments can range from a variety of areas, such as venture capital, private equity, real estate, hedge funds and other types of asset leasing. Alternative investments are not only accessible to conventional investors but also to retail investors. Alternate investments can be termed fluid due to their dynamic nature.
How Does Asset Leasing Work?
Leasing is simply a method wherein someone who has access to a capital-marketable resource grants another person permission to use that resource for a certain length of time in exchange for ongoing payments. The supplier is the exclusive owner of the goods, and upon the termination of the contract, they are given their goods back.
Via terms and conditions established by the asset’s supplier, the lease agreement, which the two parties have signed, safeguards the mentioned item or commodity. The asset itself serves as collateral in the event that any harm is issued to the asset.
Asset Leasing as a Form of Alternative Investments
When it comes to assets as a broad term, it can comprise a variety of different things that can include furniture, electronics, vehicles, office spaces etc. It is an ideal form of alternate secure investment as they have a wide range of ways to ensure capital. The leased asset provides money to the owners and the middlemen at a constant interval of time. For instance, people lease sofas or washing machines they already have lying around, and businesses can rent out these assets and pay out for them for a fixed duration of time, which can be over a month or a quarter as per the terms of the lease agreement.
Businesses may efficiently save money by leasing equipment such as office space, large-format printers, office furniture, and other gear, which can be utilized for other purposes. Businesses may use high-quality items for less money by leasing their assets. It lessens the need for significant investments. Also, leases provide new company owners with a secure barrier for companies that may modify the lease’s contractual terms to meet their preferences and requirements.
Tax Benefits and Implications through Alternative Investments
Alternative investments come with benefits with respect to taxation. The tax relief mostly depends on whether a business outright buys the asset and upon the terms and conditions of the lease agreement. This, moreover, affects if the Value Added Tax is calculated periodically or all upfront. Therefore, the taxes can decrease since the leased asset is more or less deductible while calculating a tax bill. To save money, businesses may deduct the whole cost of the assets from their taxable revenue. The depreciation of assets, maintenance charges, and other expenses are all allowable tax deductions for investors as well.
However, if an individual or business plans to purchase the entire asset at the end of the term period or the hire-purchase period, they would have to pay up the value-added tax on the entire value of the asset. This is not the case when the lessee does not end up becoming the owner of the asset at the end of the term period, wherein the value-added tax is to be paid periodically.
To understand the concept of taxation under alternative investment funds, we need to explore the three categories under AIFs, which are:
- Category 1: Investments or funds that are initiated at the early stages, in start-ups, SMEs or other social ventures, for instance.
- Category 2: These are predominantly funds that invest in debt and do not go through any sort of borrowing or leveraging.
- Category 3: These are listed or unlisted derivatives of funded leverage, and they buy allowed assets or stocks.
In the case of Categories 1 and 2, these types of investments are given pass-through status, which essentially means that there is no tax calculated at the fund. For instance, if the investment is done in start-ups and sold at a higher price, the profit gained through it remains solely with the investors, without any tax requirements. However, the tax is not passed through if the income through the fund also includes business income.
Source: Capital Mind
In the case of Category 3, all the income made through the investments in the category 3 level is to be taxed at the fund.
Source: Capital Mind
Wrapping up, asset leasing and other forms of alternative investments can be great passive income options for investors, businesses and the common people equally. That is only if they are done right via calculating all the risks and taxation that may be calculated on the said asset or investments. The aforementioned pointers are a gateway for people looking to get an insight into the act of smart alternative investments. If you want to learn more about the techniques of asset leasing and alternative investments and how it affects your tax bills, head on to Bhive, a platform that focuses on commercial real estate and rental solutions.