Edition 1, 2004 - Car Finance Traps (part 2)
Newsletter #1 2004
Moving on from our last newsletter CAR FINANCE TRAPS – part 1 where we approached the major four banks asking for a quote for car finance. Click here if you missed it.
CAR FINANCE TRAPS - part 2
Understanding the GST/FBT implications and GAP insurance
Another issue none of the banks enquired about was our GST status and they appeared to have no understanding of the potential implications to their clients.
The method a business accounts for GST is very relevant to the right product to use. If a business accounts on a 'cash' basis then they can not claim the ITC (input tax credit) up-front . If a Hire Purchase agreement is used as only part of the item has been paid for as you make the payments, under 'cash' accounting you can only claim 1/60th of the GST on a five year contract, 1/48th on a four year contract and so on as you make the payments. This becomes an accounting nightmare. You are also paying interest on the GST.
However by using a Lease or Chattel Mortgage you can obtain an up front benefit from your registered GST status.
Fringe Benefit Tax is now a major concern for a business purchasing a vehicle for the use of a director or employee. Depending on the amount of kilometres travelled for the business they can find they have an FBT liability of up to 25% of the purchase price of the vehicle and can only claim depreciation up to the luxury limit of $57.009. The system is geared to trap the company providing vehicles as a part of a employees package, in particular luxury vehicles.
We had an extreme example last month of a client that had been given bad advise and purchased and financed a $330,000 Porsche in a company name, he had only had it for 10 months and decided to sell it.
He sold it for $260,000 and as it was in a company name he also had to remit $23,636.36 in GST to the tax office (the maximum ITC he would have claimed was 1/11 of the luxury limit $5,182.64). He had financed it through a major bank and incurred a pay-out penalty of $18,300. His losses now totalled $106,753.72 - $36,753.72 in penalties and GST and $70,000 in loss of value.
But to make matters worse he had only driven 9,000kms in the vehicle and was therefore liable for a FBT bill of approx $59,000. This whole exercise has now cost $165,753.72. The FBT, GST and penalty component would have been avoided if we had advised him, this would have reduced his losses by $95,743.72. This is obviously an extreme case, in fact the worst we have ever come across but most of these pit falls are avoidable. Needless to say he wont be using any of the banks again.
stratton would always advise that you check everything with your accountant first. For information visit /finance/
The stratton insurance product GAP cover protects you from having a short fall on you finance contract should your vehicle be a total loss or stolen. Costing only approximately $11 per month GAP cover is an essential part of any vehicle finance contract.
One of our clients recently bought an 18 month old Audi A4 Quattro for $51,000. Luckily we included GAP insurance in the finance contract. After enjoying the car for a weekend, he took the car on Monday to have the windows tinted. He picked the car up that afternoon and at the first intersection he came to he was hit by another car that had run a red light. Thankfully nobody was hurt, but his Audi was a complete right off. He had insured it for market value and his insurer only offered to pay out $42,000, leaving him with a shortfall after making only one payment of approx $8,500 on his finance contract.
GAP insurance paid up and not only covered the short fall of $8,500 but gave him $3,000 inconvenience money the next day. The difference to him was he immediately bought another Audi and started a new finance contract and had $2,000 left over after paying for his motor insurance again.
GAP cover costs around $11 per month when included in your finance contract, or it can be purchased for $550. It covers the life of the finance contract and costs considerably less than an agreed value insurance policy and covers much more. You can also purchase GAP cover after you have taken delivery of your car - just give us a call or go to /insurance/gap-insurance.asp
stratton is proud to support the Port Melbourne Life Saving Club. Our sponsorship has contributed majorly to the production of new rash vests and facilities for the Nipper program.
The team at stratton