Whether it’s a ute, van or ordinary sedan, a vehicle is essential for your work if you’re a trade. And when your business needs a new vehicle, one of the first decisions is usually how to finance it. So, what are your options and how can you figure out which one is best for your business?
Accountant Kirsty Fox from Spitfire Accounting Solutions, which specialises in the trades, says there are three main options for vehicle financing: finance lease, hire purchase and chattel mortgage. Crucially, each has different implications for tax and cashflow.
“With a good old-fashioned lease, you just pay a monthly amount,” says Fox. “You claim GST on that monthly amount, but you don’t own the goods. When it comes to your profit and loss, the lease payments are deductible and that’s it.”
A hire purchase lets you hire a vehicle for an agreed period, and at the end of the loan term you take ownership of the vehicle. If you haven’t paid off the loan over the loan term, you may be required to make a ‘balloon payment’ to cover the outstanding amount.
“The thing about hire purchase is that the GST on the principal amount and interest contract is fully claimable, and you do that on the BAS when you make your first payment,” says Fox. “If you’re reporting on a cash basis, for example, and you make your first payment in April, the entire GST for the vehicle, finance, the interest on it, everything like that, is claimable at that BAS.”
Unlike a lease or hire purchase, a chattel mortgage allows you to take immediate ownership of the vehicle. The lender takes out a mortgage on the vehicle as loan security, and you pay off the loan from the income the vehicle generates in your business. Repayments are usually structured over two to five years. The longer the term, the cheaper the repayments, but the more interest you need to pay.
It’s a lot like taking out a mortgage on a house, explains Fox. “A chattel mortgage is a security over the actual property itself, so you own the goods,” she says. “Importantly, the GST on the vehicle is claimable when you buy the vehicle, so you get that whole lot then and there, which is good for cashflow.”
Hire purchase used to be the most popular option among tradies until about 10 years ago when lenders started offering chattel mortgages. Paul Raye, a partner at Think Accountants, says about 95 per cent of vehicle financing is now done through chattel mortgage.
He says the main attractions for tradies are the ability to claim the full amount of GST up front as well as the flexibility to set up a balloon payment at the end of the term to lower monthly repayments. The higher the balloon repayment, the lower your monthly repayments.
“The great attraction for tradies is basically that people will claim the GST back up front, so it tends to be more attractive from a cashflow point of view,” says Raye. “And with a flexible balloon, you can structure your repayments to suit your cashflow. Let’s say you have a 40 per cent balloon over 48 months—while you may end up paying more [than the cost of the vehicle] over the period of the loan, it suits your cashflow much better.” Many lenders also allow businesses to structure repayments around seasonal cashflow.
At the end of the chattel mortgage loan term you have two options: pay the balloon payment and keep the car, or pay the balloon payment by trading in the vehicle and get a new car and new chattel mortgage.
“It’s usually at that point that people decide if they’re going to buy a new vehicle and just keep turning vehicles over every couple of years, or pay that balloon out and keep the vehicle,” says Fox. “The main thing it comes down to is cashflow and how much of a payment you can afford each month.”
Even though most tradies end up choosing chattel mortgages to finance their vehicles, that doesn’t mean you should make the decision without chatting to your accountant first, says Raye.
“We get people who contact us and say, ‘I’ve just entered into this vehicle financing arrangement, but I probably should have called you before I did that’,” he says. “They often haven’t structured the purchase in the way they should have— perhaps they’ve bought it in their name instead of in the business structure—and there are implications for their business.”