Buying a motor vehicle
June 22, 2009 5AM
Our clients often ask us what the most tax effective way to purchase a motor vehicle is. Should they buy it outright, lease it or undertake a hire purchase/chattel mortgage arrangement.
This information sheet aims to set out the different options and the pros and cons of each.
Business motor vehicle purchases over $1,000 made between 13 December 2008 and 31 December 2009, and installed by 31 December 2010 are eligible for the bonus tax break the Federal Government has introduced for small business owners.
What this means, is that small businesses with a turnover of less than $2 million can claim a bonus tax deduction of 50 per cent of the cost of the vehicle.
This is subject to various conditions. More information is available on the fact sheet Federal Government tax incentives for small business.
Definitions
Lease – leasing provides the customer with the benefits of owing a motor vehicle while the financier maintains actual ownership. The customer pays the financier a fixed regular fee (usually monthly) for the term of the lease.
When the lease expires the customer has the option of paying a final amount and taking ownership of the vehicle, trading it in for another vehicle or refinancing the residual and continuing the lease.
Hire purchase – very similar in payments to a lease in that a regular fee is paid to a finance company that purchases the vehicle on behalf of the customer. As with a lease, there is also an optional payout at the end of the hire purchase agreement to the customer will own the vehicle. However from a legal and taxation point of view it is viewed that the car is purchased and the facility is a loan.
Chattel mortgage – an agreement whereby a finance company lends money to a customer to purchase a chattel (in this case, a motor vehicle). The customer takes ownership of the vehicle at the time of purchase and makes regular repayments to the finance company.
However, the finance company also takes out a "mortgage" over the vehicle by way of an ASIC-registered Fixed and Floating Charge to provide security for the loan.
When the term of the loan expires the customer has the option of paying a final amount and taking ownership of the vehicle, trading it in for another vehicle or refinancing the residual.
Before making a decision as to how to purchase a motor vehicle, talk to a finance broker regarding specific repayment requirement and interest rates, as these may differ depending on which option you select.
There are different tax implications for each, as the Tax Office considers a lease arrangement to be the same as a rental, but a hire purchase and chattel mortgage are seen as legally owning the asset with an option to payout a residual and own it at the end of finance.
All options have a residual at the end of the term. Leases are less flexible in this regard, where as you can negotiate the residual with a hire purchase and chattel mortgage which can make repayments higher or lower depending on cash-flow requirements.
Combination of interest and accelerated depreciation rates on assets usually means that hire purchase and chattel mortgage more tax effective than leases.
Features | Buy outright | Lease | Hire purchase / chattel mortgage |
| 50%/30% small business owners investment allowance | Yes | No | Yes |
| Upfront GST claim on cost of asset | Yes | No | Yes (No if GST on cash basis) |
| Ongoing GST claim on repayments | No | Yes | No (Yes if GST on accruals basis) |
| Deductible monthly tax payments | N/A | Yes | No |
| Deductive interest on finance | Yes | No | Yes |
| Depreciation on asset | Yes | No | Yes |
Here is an example:
Nathan buys a car for $55,000 on 30 June 2009.
If Nathan pays cash for the car and his GST is registered under the accrual basis, he would have a $5,000 GST credit, and a $25,000 investment allowance deduction in his 2008-09 tax return.
If Nathan leases the car he has no tax advantages in the 2008-09 year.
In the 2010 year, if leased, Nathan would have GST credits of $1000 over the year, and $10,000 in lease repayments deductions.
If Nathan uses hire purchase or chattel mortgage he would have no GST credits but would have tax deductions of approximately $4,500 interest and $10,000 depreciation.
Buying a motor vehicle (Downloadable version)