AFM Mortgage & Finance

Finance Options & Definitions

Novated Lease: this is an agreement between you, your employer, and the finance company. It enables you to make payments on a vehicle from your pre-tax salary, via your employer.

This type of lease can be both cost and tax-effective. You benefit as the lease payments, running costs and Fringe Benefits Tax are paid from your pre-tax income. Because FBT is dealt with concessionally, it makes sense to have a vehicle as part of your overall salary package.

It works simply: your employer deducts the lease payment amount from your gross salary, which enables you to pay for the vehicle in pre-tax dollars. These days, this is commonly known as "salary packaging".

Commercial Hire Purchase: CHP is mostly suitable if your business uses the 'accruals' method of accounting for GST, or if you use your car for business.

With the 'accruals' method, the GST component of the car's purchase price can be claimed back from the tax office in the first Business Activity Statement (BAS) that follows the purchase.

It's best to pay the GST refund off the balance of the loan, thereby reducing the amount financed and interest charges.

Of benefit, it's possible to structure a loan so you pay in the GST after you have claimed it back from the ATO, meaning you're never out of pocket.

The benefits of CHP:

  • The interest component of loan repayments and vehicle depreciation may be claimed as business tax deductions.
  • Payments remain the same over the term of the loan, helping you budget better and protecting you from changing rates.
  • You can direct debit your loan repayments from your bank account.
  • The duration of loan terms vary from 36 to 60 months.
  • The loan is secured by the vehicle.

CHP is similar to leasing except you claim the allowable depreciation on your vehicle or equipment, plus the interest component, as a tax deduction. With leasing on the other hand, you claim the actual lease payments.

Choosing between the two will depend on which option maximises your tax deduction.

 

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Chattel Mortgage: allows sole proprietors, partnerships and companies which use the 'cash' method of accounting for the GST, to claim back the GST in the car's purchase price in the first Business Activity Statement (BAS) after purchase.

There is a charge lodged by the lender with ASIC, as well as a lodgement fee.

Please note: you may not be able to lodge the charge with ASIC if your company already has a floating charge levied by its bank or other lending institution.

Features of Chattel Mortgages:

  • The interest component of loan repayments and vehicle depreciation can be claimed as business tax deductions.
  • The GST refund in the car's purchase price can be paid off the loan, reducing the amount financed and interest charges.
  • Repayments remain the same over the term of the loan.
  • You can direct debit your loan repayments from your bank account.
  • The duration of loan terms vary from 36 to 60 months.
  • The loan is secured by the vehicle.

Vehicle lease: In this situation, the finance company buys the vehicle and leases it back to you over a fixed term. By the term's end, you can choose to pay out the residual and own the vehicle outright or trade it in. Otherwise, you can refinance the residual amount owing for another term.

When purchasing the vehicle, the finance company claims back the GST, meaning you finance the purchase price less GST. Also, lease payments are made from pre-tax income, not after-tax profits, and if you use the vehicle to make a living, a tax reduction can be claimed.

Lease payments attract GST, which may be claimed back by business owners and companies registered for GST.

Please note, there are tax office rulings which affect leasing.

Other features of leasing are:

  • Payments remain the same over the term of the loan
  • You can make an upfront rental payment, thereby reducing your monthly repayments or the term of the lease.
  • You can direct debit your loan repayments from your bank account.
  • The duration of lease terms vary from 24 to 60 months
  • You can make extra payments at certain times of the financial year to minimise your tax liability.
  • The lease is secured by the vehicle.

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Which option is most suitable?