When your business needs a vehicle, one of the first decisions is usually how to finance it. Both chattel mortgage and leasing can be the right choice in different circumstances – which one is best for your business?
You need to know the difference between a chattel mortgage and a lease? The best car finance structure depends on your financial situation.
Chattel mortgages are generally financial instruments for business vehicles, as there are significant tax deductions available. The obvious advantage is the accounting treatments associated with ownership of equipment.
The chattel mortgage is a loan agreement whereby funds are borrowed to purchase a vehicle and a charge (“Mortgage”) is taken over the goods that are financed. It can be 100% funded or equity like a deposit or trade can be contributed.
Tax deduction is usually the interest on the facility and depreciation and if you’re a business and registered for GST, the GST input credits.
Chattel mortgages are especially attractive to businesses registered for GST, especially if the vehicle is used for predominately business purposes. The full GST input tax credits on the purchase price of the vehicle can generally be claimed in full in the BAS following the purchase.
Terms are generally from two to five years, and ‘residual’ or ‘balloon’ payments (ie lump sums payable at the end of the contract) are incorporated into the structure of the agreement. These can help to keep the payments low.
- You own the Vehicle from Day 1
- You can claim interest and depreciation components in some scenarios
- You maybe able to can claim full GST input credits in first BAS
Operating Rental Lease
Operating Rental Lease is treated generally like renting. That means, the lease payments are treated as operating expenses and the asset does not show on the balance sheet.
The financier purchases the vehicle on your behalf and then leases it to you. The repayments are, essentially, rental payments.
At the end of the term, you might have the option to purchase the vehicle for a lump sum (residual value). Alternatively, you might choose to give the vehicle back, or re-finance the residual and continue leasing the vehicle – depends on the lenders contract.
Generally, terms ranging from two to five years, and may incorporate balloon/residual amounts.
Leased cars are not yours to depreciate (it belongs to the leasing company and they have a nice deduction depreciating it)
- Renting is off balance sheet therefore doesn’t affect your capacity to borrow further
- Ability to be able to claim 100% epayment as tax deduction
- Buy at end of term and own
You need to consult with your tax advisor on the tax benefits of equipment ownership through a chattel mortgage agreement versus a total write off of equipment lease payments under a lease.
So which finance option is suitable? It depends on your requirements.