There are many options for businesses to finance motor vehicles. Interest rates and borrowing costs are the obvious starting point when comparing finance options, however, tax deductions, GST implications, and fringe benefit taxes should also be considered.
Vehicle leasing
Leasing is a popular option for businesses financing vehicles because it is generally highly tax effective, and lease agreements can be structured for maximum cash flow advantages. The financier owns the vehicle until the end of the lease, when the residual is paid. There is no deposit, and GST is paid monthly rather than on the initial purchase. Lease payments are fully tax deductible, provided the car is not a luxury vehicle and you only use it for business purposes, although you cannot claim depreciation.
An operating lease is particularly appealing to businesses that make heavy use of vehicles. The business enjoys long term exclusive use of the vehicle, in return for lease rental payments. In many ways, it is like a long term hire car agreement. The finance company bears the risk of losing money on the sale of the vehicle at the end of the lease. Operating leases don’t show up as assets on the balance sheet, but this type of lease is ideal for a business that anticipates replacing the vehicle at the end of the lease period. Among the drawbacks of operating leases is a possible penalty clause for exceeding a set annual mileage, and penalties for early termination of the lease.
Commercial hire purchase
The financier retains ownership under a commercial hire purchase agreement. An important difference from leasing is that the agreement can include a deposit and zero residual. GST is paid, and recoverable, at the time of purchase if your business uses the accrual accounting system. Businesses using cash accounting can only claim the GST refund over the term of the contract. You can claim a tax deduction for the interest and depreciation, but not for repayments of principal.
Chattel mortgage
Under a chattel mortgage, the financier retains title until the final payment is made. There is no residual, and a deposit is optional. Depreciation can be claimed as a tax deduction, and as with a hire purchase agreement, GST applies and is recoverable at the time of purchase. For businesses registered for GST on a cash basis, chattel mortgages offer the advantage that GST is recoverable in full on the first Business Activity Statement after the purchase of the vehicle.
Business credit and loans
A business credit card may be used to purchase a car. Credit card finance is quick and convenient, and highly flexible. Interest costs may be higher than other options, and some dealers levy a credit card surcharge, adding between 1% and 4% to the purchase cost.
Of course, business operators always have the option of financing car purchases through their business overdraft or business loan. Buying cars with a credit card or business loan may limit tax benefits, although the interest on your loan, overdraft or credit card is claimable.
GST is paid and recovered at the time of purchase. You gain immediate full title to the vehicle and it shows as an asset on your balance sheet, and you can claim depreciation on the vehicle. Financing this way may have advantages when negotiating with car dealers as some offer generous discounts for immediate cash payment.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.