With not long to EOFY business owners will be looking to move to acquire new cars to realise motor vehicle finance tax deductions in this financial year. The timing also coincides with when it is highly expected that the RBA will move to increase the cash rate. A move which will flow on to the motor vehicle finance sector and effectively signal the end to the historic low lending rates that have been enjoyed over the past 20+ months.
Acquiring new vehicles now may deliver both cheaper interest rates than waiting a few months as well as benefits from a tax perspective. But the tax benefits vary across the range of business vehicle finance products. The choice of finance product can therefore be crucial in the cost-effectiveness of the vehicle purchase. How the purchase impacts the business bottom line and as such profitability and productivity.
This summary of the tax deductibility of different elements of the various types of finance available for business vehicles is provided to assist buyers by providing insights for choice of finance product. While we are specialists in business finance, our role is primarily to source, negotiate and structure car loans based on our client’s brief. We advise business owners to consult with their accountant or finance officer if unsure of which loan type will deliver the overall optimal benefit to their business.
The finance types we are comparing are:-
- Sole trader Car Financing
- Motor Vehicle Lease
- Motor Vehicle Hire Purchase
These finance products are available for the purchase of vehicles deemed for use in a business and include passenger vehicles, sedans, SUVs, utes, all models of cab chassis, light commercial vans and others.
Loan Interest Tax Deductions
The interest portion of motor vehicle finance is considered a tax deductible expense for all of the finance products being considered. Monthly payments will include an interest component and component covering repayment of the loan amount.
Finance Repayment Deductions
With Leasing, the monthly lease payments are considered as a business expense and fully tax deductible. That includes both the interest component and the loan repayment component.
With Chattel Mortgage, the entire total of the monthly repayments is not tax deductible. The interest component is tax deductible as noted above. The balance is not deductible. Refer to our point on depreciation for the major tax benefit of this type of finance.
Depreciation Tax Benefit
Depreciation is a tax benefit on the acquisition of business assets. The asset, in this case the motor vehicle, is depreciated by a certain percentage each year over a set number of years. The amount being depreciated is a tax deduction. The ATO establish depreciation schedules.
In order for the vehicle to be ‘depreciable’ it needs to be listed on the balance sheet of the business and that means the asset needs to be acquired using the appropriate form of finance. That is considered to be Chattel Mortgage.
Quick update: with Chattel Mortgage ownership of the motor vehicle is immediately transferred to the borrower at settlement. This means the vehicle is posted to the balance sheet of that business. With Leasing the lender retains the ownership to the vehicle and as such the vehicle is not posted to the borrowing business balance sheet. As such it is not a depreciable asset for that business.
So with Leasing the repayments are tax deductible but with Chattel Mortgage the major deduction is realised through depreciation.
Treatment of GST
GST is a tax and how it is treated with the purchase of a motor vehicle may be significant to some operators. With Chattel Mortgage the full amount of GST applicable to the purchase price of the vehicle can be claimed on the next corresponding BAS. That may be a significant plus if the business has a large GST obligation in that period. That obligation may be significantly reduced by the GST deduction for the car and ease cash flow for the BAS payment period.
With Leasing the GST is applied to each of the monthly lease payments. That component of the payments can be claimed on the correct/corresponding BAS. Whether that be paid monthly, quarterly or annually.
Temporary Tax Measures
In addition to ongoing tax benefits that can be realised through business asset purchases, from time to time the Government introduces temporary measures. Most recently that has occurred with the introduction of Instant Asset Write-Off and temporary full expensing.
These measures allow for the full cost of eligible assets purchased by eligible business enterprises to be full expending or deducted in the same year that they were acquired. This only applies to assets which would normally be depreciated in line with ATO schedule.
To acquire vehicles with the intention of utilising IAWO, Chattel Mortgage should be considered as the most suitable form of finance. These temporary measures are currently in place until 30 June 2023.
Selection Considerations
While achieving the most effective tax deductibility from motor vehicle finance, there are a number of consideration that businesses should cover off in selecting finance products:-
- Accounting method used by the business is suited to the finance product.
- Overall financial and business objectives of the operation.
- Individual businesses will need to meet ATO criteria in regard to tax deductions.
We have discussed business vehicle finance in regard to tax deductions as in general terms car loans made by private individuals for vehicles for private use are not considered tax deductible. Where a private vehicle is used for business purposes, owners should consult with their accountant and/or employer as to what can be claimed or compensated for.
To acquire motor vehicles in this financial year at the current cheap interest rates call Jade Car Loans 1300 000 003
DISCLAIMER: IN REGARD TO MISREPRESENTATIONS AND ERRORS CONTAINED IN THE MATERIAL AS PRESENTED, LIABILITY IS NOT ACCEPTED. THE DETAILS AND CONTENT IS PROVIDED FOR CAR BUYERS AND INDIVIDUALS AND BUSINESS SEEKING FINANCE PURELY AS GENERAL INFORMATION. THIS IS NOT PROVIDED AS THE ONLY SOURCE OF FINANCIAL INFORMATION. ANYONE THAT CONSIDERS THAT NEED FINANCIAL ADVICE ABOUT THEIR SPECIFIC REQUIREMENTS SHOULD SEEK THEIR OWN FINANCIAL ADVISOR.
