What is the best method of financing a business vehicle? I operate a small business and previously leased my cars which enabled me to do some tax planning by making up-front payments depending on cash-flow.
Is this possible with Chattel Mortgage or 'Hire Purchase' type agreements or do you have to claim interest and depreciation separately instead of claiming the entire lease payment?
PS: Interest rates are as important to me as the actual method of finance."
Thanks for sending through your question. This is a common question we are asked regularly, particularly by clients that are small businesses owners.
I can talk to how Chattel Mortgages and Commercial Hire Purchase agreements (CHPs) are currently treated by our tax system, however, for personalised advice on how best to structure your finances for both tax and cash flow planning, you'll need to speak with your tax accountant.
Can you claim Chattel Mortgage or Commercial Hire Purchase payments as tax deductions?
The short answer is no.
Unlike a car lease, where you can claim the full payment amount as a deductible business expense, you can't claim the payment itself.
Under both a Chattel Mortgage and a Commercial Hire Purchase agreement, you can only claim the interest component of the loan and the depreciation on the vehicle as deductible expenses at tax time.
Choosing between a Chattel Mortgage and a CHP
Since legislative changes came into effect on July 1, 2012, CHP's have become much less popular with our clients.
This is primarily because since these changes took effect, GST has been charged not only on the purchase price of the asset, but also on all term charges (interest) and fees associated with the CHP. Therefore, the total monthly repayment amounts under a CHP would be higher than those for a Chattel Mortgage of the same amount.
You can read more about these tax implications, including a simple example, here.
Can you make extra payments on a Chattel Mortgage?
You can, but the question really is 'Why would you?'.
With a Chattel Mortgage, you do have the option to make payments in addition to your regular scheduled payments, if your cash flow permits.
However, as I've outlined above, unlike a Car Lease, you can only claim the interest component of the loan as a tax deduction. So if the goal of making additional payments is to reduce your taxable income, you will only do that by the amount of interest in each payment.
Making additional payments on your Chattel Mortgage to reduce the term of your loan may not guarantee overall interest savings. If you've paid off a Chattel Mortgage faster than expected, depending on the lender, you may be assessed for an interest reduction, but you may still have to consider early termination (early payout) fees.
It pays to think ahead
With all that said, it's great to consider these things before you take out a loan.
You said that interest rate was important to you. Fair enough! However, while the interest rate does impact your weekly payments, it's certainly not the only thing you should be considering.
For instance, you may find a loan option with a low interest rate, but it may have early exit fees. So if you decide to exit your loan early (and keep the car) or decide to sell your car and pay out the loan, you're up for a payout penalty at the end. If you knew at the start an early payout was on the cards, you might have opted for a loan option with no early exit fees - even if that loan had a slightly higher interest rate, the overall cost of the loan could be less.
At stratton, we give you access to a range of finance options from a panel of lenders. By discussing your plans with your consultant, they can help you find a finance package that will represent the best value to you over the entire life of the loan.
Instant Asset Write-Off
Finally, don't forget about the $20k Asset Write-Off. Brought in by the government in May 2015 (and scheduled to expire on 30 June 2017), the new laws allow small businesses to claim an immediate deduction for assets they purchase with a value of $20,000 or less.
If you're thinking of a new car, find out if your business is eligible and see how much money you could get back. Read more about the Instant Asset Write-Off here
NOTE: As announced in the 2016 Budget, from July 1 2016, the threshold for small businesses eligible to access the simplified depreciation rules is up from $2m to a $10m annual turnover.
David, if you need any more information about vehicle financing, and different options available to you and your business - call a stratton finance consultant on 1300 STRATTON (787 288) or get a 60-second online quote here.
Thanks again for your question,