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Motor Vehicle Finance

Car Finance

There are various ways to finance the purchase of your car but the most commonly used product is the Chattel Mortgage. Always seek advice from your Accountant on the rules and how they apply to your particular business and equipment.

You may also want to visit the Australian Tax Office website at: www.ato.gov.au/businesses for further information.

Leasing

Goods are solely used for business purposes. The amount financed is exclusive of GST (the finance company covers this cost as they are purchasing the goods for you). The monthly rental payments are subject to GST and stamp duty. The residual value and early termination are also subject to GST.

The goods need to be shown on the balance sheet as both an asset and liability. However you may be liable to pay fringe benefits tax for any private use of the financed goods. (Please refer to the ATO website.

Commercial Hire Purchase (CHP)

Hire Purchase is similar to leasing except that you will automatically own the goods when you make the final payment. This means that only the interest payments made on the loan are tax deductible.

Depreciation of the asset is also allowed as a tax deduction. The interest rates on both CHP and Leases are fixed for the term of the loan which can vary between 1 and 5 years.

Deposits are optional. You might choose to trade in an existing vehicle in order to put in a deposit to reduce the amount to be financed.

Residual / Balloon: You can elect to have a balloon payment as the last payment of your finance agreement. This balloon payment is usually between 10% – 40% of the cost price, but may be as low as one dollar, dependent upon the equipment. This decision is usually influenced by the level of monthly payments you are comfortable with.

Owner of the goods: The financier retains legal title (i.e. owns the goods) during the term of the agreement. You automatically secure ownership upon payment of the final instalment.

Accounting Benefits: For income tax and GST purposes, a hire purchase agreement is treated very differently to a finance or operating lease. Under GST, a hire purchase agreement is treated as a “taxable supply” at the start of the arrangement between the hirer and the financier.

With a hire purchase arrangement, there is deemed to be a sale of the equipment from the financier to the hirer, the GST liability arises at the commencement of the arrangement. Even though the total amount payable under the agreement will be paid by periodic instalments and ownership of the equipment will not pass to the hirer until the final repayment. The financier, being the supplier, is responsible for the payment of the GST liability.

Therefore the amount financed is inclusive of GST, and your monthly repayments are not subject to GST unless you are on a cash basis for GST. (Seek advice from your accountant). You can claim the interest component of all repayments. The depreciation of the goods is fully tax deductible providing goods are used 100% for business purposes.

The goods you purchase become an asset that shows on your balance sheet for your business. The goods will also be a contingent liability until the end of the finance agreement. You may be liable to pay fringe benefits tax and should refer to the ATO at: www.ato.gov.au/businesses for further information)

Operating Lease

An Operating Lease, Equipment Rental or Rental Agreement is a versatile option for financing high depreciation, short life span new technologies such as computers, telecommunication and all other office equipment which generally have a short lifespan due to high obsolescence. The finance company purchases the equipment and rents it to you for an agreed payment schedule over a fixed term. Whilst similar to a Finance Lease, an Operating Lease has greater flexibility.

It provides the ability to upgrade to new technology with a simple variation of your existing contract(certain criteria applies). This variation can be implemented during the initial term of the agreement.

You can add in pieces of equipment and if required replace or upgrade equipment. You can choose to have maintenance software installation and other intangible items included in the agreement.

The term of finance agreement can be from 1 – 5 years and must be in accordance to ATO

Guidelines.

Deposits are not required. The full purchase price must be financed.

Residual / Balloon: You must have a residual payment as the last payment of your finance agreement according to ATO Guidelines. This residual value is determined by the finance company and the latter is responsible for paying it. Be aware that the residual values are generally not disclosed to you.

Owner of the goods: You have possession and use of the equipment, however, the finance company shoulders most of the risk of ownership.

Expiry of Rental Period: At the end of the Rental Period, you have a number of options:

    • Return the goods to the finance company, without any responsibility for loss incurred by the finance company for the resale.
    • Return the goods to the finance company and enter into another agreement on new upgraded equipment.
    • Purchase the equipment at a fair market value (usually very low due to the high depreciation of the equipment).
    • Re-rent the goods at a lower rate for a further term.

Accounting Benefits: Rental payments are 100% tax deductible because they are treated purely as an operating expense the equipment must be used solely for business purposes. Rentals do not appear on the balance sheet, therefore there is no contingent liability. Rental payments are subject to GST, with the amount financed being exclusive of GST. However you may be liable to pay fringe benefits tax (Please refer to the ATO at: www.ato.gov.au/businesses for further information).

You should always seek advice from your accountant on the rules and how they apply to your particular business and equipment.

Novated Lease

A Novated Lease is used for employees who have the option of taking a motor vehicle as part of their salary package. The employer pays all rental payments to the financier on the employee’s behalf and the employee enjoys full use of the motor vehicle.

The term of finance agreement can be from 1 – 5 years and must be in accordance to Australian

Taxation Office Guidelines (ATO).

The employee then novates the lease to their employer, who assumes all the employee’s rights and obligations under the lease, including responsibility of meeting the lease payments, normally deducted as part of the employee’s salary package.

Deposits are not required. The full purchase price must be financed.

Ownership of the vehicle: The contract is in the name of the employee who remains the registered owner throughout the lease and keeps effective control of the vehicle at all times. If the employee leaves the company, the vehicle remains with the employee. In this situation, generally the employee takes over the payments or gets another employer to make the payments. This means, the original employer is not left with an unwanted car and the employee keeps the vehicle.

Residual / Balloon: You must have a residual payment as the last payment of your finance agreement according to ATO Guidelines. This usually varies between 37% and 75% of the cost price of the vehicle. This amount usually represents the approximate value of the goods at the end of the lease. A residual payment allows for lower monthly payments and leaves you with more working capital to run your business. You may refinance this residual value at the end of the contract (depending on the finance company). The following range of residual values may be a useful guide for Finance Lease transactions, which fall within the guidelines issued by the ATO:

Term Residual/ Balloon

1 Year 65.50% – 75.00%
2 Years 56.25% – 65.00%
3 Years 47.00% – 55.00%
4 Years 37.50% – 45.00%

Accounting benefits: The monthly rental payments are 100% tax deductible, providing the goods are solely used for business purposes. The amount financed is exclusive of GST (the finance company covers this cost as they are purchasing the goods for the employee). The monthly rental payments are subject to GST and stamp duty. The residual value and early termination are also subject to GST.

Employers can attract employees by offering a vehicle as part of a remuneration package, without having it appear on their balance sheet. However you may be liable to pay fringe benefits tax (Please refer to the ATO at: www.ato.gov.au/businesses for further information).

You should always seek advice from your accountant on the rules and how they apply to your particular business and equipment.