Does your small business need to purchase a new or used vehicle or other business equipment?
Not sure which type of finance is best suited to your needs.
Below are two methods which are most commonly used and the benefits explained for both:-
- Chattel Mortgages or
- Commercial Hire Purchase (CHP)
- 1. CHATTEL MORTGAGES:
Under a Chattel Mortgage the financier advances funds to the customer to purchase a vehicle or goods and the customer takes ownership of the vehicle or goods (chattel) at the time of purchase. The financier then takes a “mortgage” over the vehicle or goods as security for the loan by registering a Fixed and Floating Charge with ASIC.
Once the contract is completed, the charge is removed giving the customer clear title to the vehicle or goods.
BENEFITS OF A CHATTEL MORTGAGE:
- Flexible contract terms ranging from 24 to 60 months (two to five years)
- A residual value (balloon) can be applied to the contract enabling the monthly repayments to be tailored to a budget
- Fixed interest rates
- Monthly repayments are fixed
- Costs are known in advance
- Deposit (either cash or trade-in) may be used
- No capital outlay is required therefore protecting your cash flow
- A tax deduction is available when the vehicle is used for business purposes for running costs and interest paid and depreciation is also a claimable tax deduction
- A customer who is registered for GST can claim the GST contained in the vehicle or goods price as an input credit on their next Business Activity Statement (BAS)
- No GST is charged on the monthly repayment or the contract balloon amount
- The finance is secured against the vehicle or goods, allowing for lower interest rates
CHATTEL MORTGAGES SUIT:
- A Chattel Mortgage is suitable for those companies, partnerships and sole traders who use the cash method of accounting (they record business income and expenses as and when they occur) as it allows them to claim the GST in the vehicle’s or goods price up-front.
- GST is charged in the purchase price of the vehicle or goods but not the monthly rental or the contract balloon (final instalment).
- Where the customer is registered for GST, they can claim some or all of the GST contained in the vehicle or goods price as soon as they lodge their next BAS, rather than over the term of the loan.
- Under a Chattel Mortgage the customer can claim the interest charges on the contract and depreciation up to the Depreciation Limit as a tax deduction.
- 2. COMMERCIAL HIRE PURCHASES:
A Commercial Hire Purchase (CHP) is a commercial finance product where the customer hires the vehicle or goods from the financier for a fixed monthly repayment over a set period of time. Under a Commercial Hire Purchase (CHP) arrangement the financier agrees to purchase the vehicle or goods on behalf of the customer and then hire it back to them over a set period of time. The customer has the use of the vehicle or goods for the term of the contract, but is not the owner of the vehicle or goods.
At the end of the contract term when the total price of the vehicle or goods (minus any residual) and the interest charges have been paid in full, the customer takes ownership of the vehicle or goods.
BENEFITS OF A COMMERCIAL HIRE PURCHASE:
- Flexible contract terms ranging from 24 to 60 months (two to five years)
- Residual value (balloon or final instalment) may be placed on contract
- Fixed interest rates
- Monthly repayments are fixed
- Costs are known in advance
- Deposit (either cash or trade-in) may be used
- A tax deduction is available when the vehicle is used for business purposes for running costs and interest paid and depreciation is also a claimable tax deduction
- GST is not charged on the monthly rental or residual payment
- Customers registered for GST can claim the GST in the vehicle or goods price
- The finance is secured against the vehicle or goods, allowing lower interest rates
COMMERCIAL HIRE PURCHASE SUITS:
- A Commercial Hire Purchase (CHP) is suitable for companies, partnerships and sole traders who account for GST on an Accruals basis, and individuals using the vehicle or goods for business purposes.
- Where the hirer is registered for GST, they can apply Input Tax Credits to claim some or all of the GST contained in the purchase price of the vehicle or goods.
- Businesses using Accrual accounting can claim the GST as a lump sum on their next Business Activity Statement (BAS), whereas those usingCash accounting can claim the GST in instalments over the term of the contract.
- GST is not charged on the monthly repayment or on the balloon (final instalment) amount.
- Where the vehicle is used for business purposes, the hirer can claim depreciation up to the Depreciation Limit and interest charges on the contract as a tax deduction.
IMPORTANT DISCLAIMER: This article does not constitute advice. This article is to be used as a general guide for our clients for their own private information. Clients should not act in isolation or solely on the basis of the material contained herein. We therefore recommend that formal advice for your situation be sought before taking action in any of these areas.