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Hit the highway with tax-effective business vehicle finance

By Damien Rouse, Westlawn Business Finance Specialist
25 August 2015

If you’re in the market for a new business vehicle, there are a number of finance options available to you. Currently, the two most popular choices are a finance lease or chattel mortgage. Commercial hire purchase was also common for financing new business vehicles, however GST changes introduced from 1 July 2012 made this option significantly less attractive in most situations, and demand has since decreased accordingly.

Today, we will discuss the finance lease and chattel mortgage. What are the similarities and differences, and which option may be right for you?

And while not strictly for commercial purposes, we’ll also look at how a novated lease can be an effective way for employees to purchase a new car for private use.

Chattel mortgage

A chattel mortgage can be an effective way to finance a vehicle for business use. When you purchase a vehicle this way, you own the vehicle, which is then used as security (financier takes a mortgage over the vehicle). Usually, this will be sufficient security and the financier will not require any other business assets as security.

Repayments are fixed for the term of the loan and you may also have the option of reducing your monthly repayments by agreeing to pay a balloon payment at the end of the loan term. The maximum balloon payment will generally depend on the length of the loan term and the type of vehicle being purchased.

Tax treatment

A chattel mortgage may be particularly suited to sole traders, partnerships or small businesses that use the cash method of accounting (recording business income and expenses as they occur). This is because GST is only charged on the purchase price, allowing the business to claim the GST on the purchase price up front. GST is not payable on the repayments or on any residual payment at the end of the term.

Finance lease

A finance lease is a popular option for businesses that update their vehicles regularly.

With a finance lease, you select the vehicle, the lessor (finance company) buys the vehicle and leases it to you.

Your monthly lease payments are fixed for the period of the lease so you know how much you’ll be paying over the term. This, of course, helps with budgeting. You can choose to reduce your monthly lease payments by paying an agreed lump sum residual (or balloon payment) at the end of the lease term.

At the end of the lease, you can trade in the vehicle and start a new vehicle lease, or you can pay out the residual and keep the current vehicle.

Tax treatment

With a finance lease, the financier claims the GST on the vehicle’s purchase. Therefore, you finance the purchase price less the GST component. GST is, however, payable on the monthly lease payments and on the residual value at the end of the lease.

If the vehicle is for business purposes, and the amount financed is below the ATO’s Depreciation Limit ($57,466.00 for the 2015-2016 financial year), the lease rental can be claimed as a tax deduction.

Novated lease

While not strictly for business purposes, a novated lease could be a tax-effective way for employees to purchase a new car, even if they don’t earn a high salary, drive long distances or use the car mostly for work.

For many employees, arranging a novated lease as part of a salary package can be an effective way to purchase a new car. Depending on the employee’s individual situation, the arrangement could provide income tax and GST savings. Employees should first seek professional advice before deciding whether this is a suitable option.

By entering into a novated lease agreement between the employee, employer and the novated lease provider, the employer makes regular lease payments on the new car from pre-tax salary for a fixed term, generally between 2 and 5 years. There are also GST savings on the purchase price of the car as the employer can claim an Input Tax Credit which is then passed onto the employee.

At the end of the term, the employee pays the residual value. GST will be payable on this amount. The residual value can generally be refinanced for a further term.

How employees could benefit from a novated lease

    • Choice of car to suit lifestyle.
    • Car is treated like a company car for tax purposes.
    • Making lease payments from pre-tax salary can provide tax benefits.
    • Costs of maintaining and running the car can be included.
    • Employee can keep the car and continue the lease if they change employers.

For all business finance options, the tax issues can be complex, so seek advice from an accountant or tax specialist to ensure a particular finance structure is right for you.

To find out about financing your next business vehicle, speak to a Westlawn Business Finance Specialist today.

Copyright © 2015

Disclaimer

The information provided is general information only and is provided without considering your personal circumstances. You should first seek your own independent professional advice before making a decision as to whether a chattel mortgage, finance lease or any other finance may be suitable for your business. Or, if salary packaging or novated leasing may be suitable for you. Westlawn Finance Limited may receive commissions or rebates in connection with some services it provides or arranges with third parties.