Car Leases...Tax-Effective?

[JIT]

Hi there,

For a business owner who uses a car for business purposes, is it worthwhile leasing a car to do this instead of purchasing one?

Eg. lease a new car for 5 years and the costs of the lease and running costs are all tax-deductible?

Rather than come up with say 50k-150k cash or borrowings to buy a new car outright?

And, every 5 years get a new car to lease? Nice!

Cars generally go down in value anyway, so it's not like if you buy and hold a car you're hanging on to an appreciating asset.

Is that what business folks do with cars?

I'm trying to see if it can be cost-effective for me to lease a new car as I don't like the idea of stumping 50k+ (cash or borrowed funds) for a new car (or even a used car for that matter).

Thanks for any posts, I'm pretty clueless on this topic.

[Collector]

If you buy it in the business then yes a lease is fine, if you get a car allowance from the business and you buy the car yourself hire purchase is better.


You will still need a log book either way.

All cost are claimable though the business including the gst

[Propertunity]

JIT, if your business is registered for GST it gets even better.

Use a chattel mortgage to finance the vehicle. Say your car cost is $55K incl GST. You get back $5K in cash in your very next BAS return. This (if you want) can fund 5 months of the car payments. (assumes payment of $1K pm)

If you arrange to have say a 30% baloon payment at the end of say a 4 year finance period, you'd normally expect the car to be worth 30% of the purchase price (this depends on the manufacturer & model etc) at this time. Sell the car, payout the loan and do it all again.

And of course with companies, payments come out of expenses before tax - so good all around.

[Rolf Latham]

FBT can be a bogey though !

ta
rolf

[hwd007]

Yes that's what my accountant said. i.e. re; FBT complications.

[Rolf Latham]

One of ours is a dual cab ute and is thus exempt, but another one ofours attracts around 4 k pa for a 45 k car

ta
rolf

[Dazz]

Or just buy some old clanger for 3K and put the remainder into something useful instead of swanning about. Noice !!!

[AUSPROP...]

Use a chattel mortgage to finance the vehicle. Say your car cost is $55K incl GST. You get back $5K in cash in your very next BAS return. This (if you want) can fund 5 months of the car payments. (assumes payment of $1K pm)



I think you can only claim GST in relation to the % of busienss use? i.e. 50% busienss use = $2500 refund

[Propertunity]

You can get around FBT by making an 'employee contribution' to the company for the private use component of the car's cost. There is therefore no fringe benefit to tax. This effectively lowers the FBT rate back to the employee's PAYG tax rate. You need to get specific accounting advice but there are very tax effective ways of doing this.

[Buddybee]

18 months ago we decided that it was more tax effective to use a chattel mortgage to finance a vehicle for our business. Up until that point we had always owned our vehicles (no finance) in our personal names and claimed business usage.

As Prop indicated, getting the GST back in our next BAS return was a nice sweetener. The GST refund covered 6 months of car payments in our situation. The other bonus for us was that we freed up our personal capital by selling our personal car and were able to use those funds to invest.

Cheers
Buddybee

[craigb]

Or just buy some old clanger for 3K and put the remainder into something useful instead of swanning about. Noice !!!

i agree and i see the entire lease option as an offer on another do-dad, call it a lease but its still financing a devaluing asset, if you think you can afford the lease why not save the $$$ instead, its not like gearing up a car will work in your best financial interests.
I have plenty of aquaintences that " swan " around in new auto,s and i think they believe they actually own them? untill they go and upgrade.
if you don't have actual cash for the final pay out then your stuck in getting the next one.
I feel sorry for the young show ponys. new 40k utes and living at home with mum or renting, they don't know any better.It gives them a fulse sence of ownership, and they forget untill next month they dont own jack s**t. three years barly getting what the difference is on the price??/

[Rob G.]

One of ours is a dual cab ute and is thus exempt, but another one ofours attracts around 4 k pa for a 45 k car

ta
rolf

Not fully exempt from FBT, possibly exempts home-work travel from FBT.

No other private use exempt unless minor and infrequent.

Just need to point this out for others ...

Cheers,

Rob

[Lamingtons]

Don't forget you can claim the GST back for the ongoing costs.

[Rob G.]

Eg. lease a new car for 5 years and the costs of the lease and running costs are all tax-deductible?



Leasing can be very good from a cash flow viewpoint.

Genuine leases usually allow all payments as a tax deduction - except in the case of luxury cars.

Income Tax can be quite generous if you purchase the car for residual value and then eventually dispose of for a profit and is not otherwise deemed income.

Cheers,

Rob

[buzzlightyear]

Noticed a few ads recently by Mercedes that they are introducing operating leases. No upfront payment, no balloon payment, not sure what are the restrictions about kilometers, servicing etc but an interesting option for some

[aw1]

You can avoid the FBT issue (it doesn't avoid the cost obviously) by keeping a log book for 12 weeks and apportioning private use vs business use. You then use the business use % to apportion deductions for all costs. Obviously there is no tax deductibility on the private portion.

My accountant recommends this to avoid the hassle of having to deal with FBT.

[JIT]

Thanks for the replies, but still a bit confused here!

My next question is what type of leasing arrangement?

Eg. if as a business owner I want to lease a Merc for business purposes for 5 years, and at the end of the 5 years just hand the car back, ie. I don't really want to own it (though not sure if this is the right way to go here?), but want to get a new car at the end of the 5 years.

Which of the following is the most cost and tax-effective for me?

Finance Lease (aka...Car Lease/Auto Lease/Vehicle Lease/Asset Lease)
Commercial Hire Purchase
Chattel Mortgage
Novated Car Lease
Maintained Novated Lease
Novated Operating Lease

And here's a Merc ''Operating Lease":

http://www2.mercedes-benz.com.au/content/australia/mpc/mpc_australia__website/en/home_mpc/passengercars/home/new_cars/rep_finance_lease/rep_clkclass.html

Thanks.

[JIT]

JIT, if your business is registered for GST it gets even better.

Use a chattel mortgage to finance the vehicle. Say your car cost is $55K incl GST. You get back $5K in cash in your very next BAS return. This (if you want) can fund 5 months of the car payments. (assumes payment of $1K pm)

If you arrange to have say a 30% baloon payment at the end of say a 4 year finance period, you'd normally expect the car to be worth 30% of the purchase price (this depends on the manufacturer & model etc) at this time. Sell the car, payout the loan and do it all again.

And of course with companies, payments come out of expenses before tax - so good all around.

Thanks.

With the chattel mortgage, can you also claim depreciation of the car over the four years?

So you claim eg. $1k per month for the interest payments as well as this ''non-cash'' deduction...not sure how you work out how much it may be though...?55k divided by 4?

That's a lot of tax deductions!

I wonder what the after-tax cost of holding a car in this way may be?

Could you be cash-flow positive after tax???!!!

Damn this $hit is interesting!

How is a chattel mortgage different from a commercial hire purchase?

Is it basically the same thing except chattel is better if you use the cash method of accounting and commercial hire purchase is better if you use the accruals method of accounting (in order to claim GST back as a lump sum at next BAS)?

What are the implications of buying a car over the ''luxury tax'' limit thing, eg. for 70k?

[Rob G.]

But with chattel mortgage (loan secured against the car) and hire purchase, you cannot deduct so much of the repayments that represent capital. You only deduct the "interest" component of the payment to the Financier. And you get a deduction over time for depreciation being the holder.

With a lease that is effective for tax purposes, you get to deduct the whole lease payment when made/due, and no depreciation claimed since you are not the holder.

Some leases are more expensive because the financier retains liability for maintaining and replacing the car - usually for fleet operators who cannot be bothered.

Novated leases often occur where the "lessor" is really only a finance company and arranges the asset to be supplied by somebody else.

NOTE a mercedes "operating lease" may be regarded as hire purchase for tax purposes if it is a luxury car.

You need to talk to your Accountant about how you finance your business, (s)he will be familiar with your situation.

Cheers,

Rob

[TheDoctor]

There are also differences in how GST can be claimed.

Operating Lease
No matter if you're on Cash or Accrual for GST purposes, you can only claim a portion of the GST with each lease payment.

Chattel Mortgage/Hire Purchase
Cash - A portion of the GST with each payment
Accruals - The entire amount upfront

Finance Lease / Loan
No matter if you're on cash or accruals, it's the whole amount upfront.

As Rob said, see an accountant. The best form of leasing arrange for your sitation will depend on a lot factors and how they interoperate.

[TheDoctor]

There are also differences in how GST can be claimed.

Operating Lease
No matter if you're on Cash or Accrual for GST purposes, you can only claim a portion of the GST with each lease payment.

Chattel Mortgage/Hire Purchase
Cash - A portion of the GST with each payment
Accruals - The entire amount upfront

Finance Lease / Loan
No matter if you're on cash or accruals, it's the whole amount upfront.

As Rob said, see an accountant. The best form of leasing arrangement for your situation will depend on a lot factors and how they inter-operate.

[Sunfish]

Has anyone mentioned that if you pay out a lease at maturity and then trade the car, your purchase date is that of the final payout so any "fat" in the deal is fully taxed? Hire purchase/chattel mortgages start when you take delivery.

A mate of mine (a good accountant) who passed on over 25 years ago didn't agree with them then. As far as I know, nothing has really changed.

That is not to say that such general advice suits all but if you are so far down the totem pole that you need to ask a forum instead of your accountant, go for the cheapest/simplest offer.

[evand]

If you lease a vehicle you can only claim the lease expenses and associated running costs. If your business buys the vehicle with a commercial hire purchase loan you can claim the repayment costs, running expenses PLUS the depreciation on the vehicle.

As depreciation is usually the largest vehicle expense - especially for expensive cars - it can make a big difference.

With a lease you cant claim the depreciation as you (or your business) does not own the vehicle. The leasing company does.

So just get a commercial hire purchase loan for the car in the name of your business. Deduct say 20% (or nothing) for private use on your claim. Simple.

[Propertunity]

Or just buy some old clanger for 3K and put the remainder into something useful instead of swanning about. Noice !!!

In relation to cars (a depreciating asset) I think this is possibly the best advice ever. Many times I have been swanning about in a $1,000 a month liability thinking that it was preventing me from building my IP base more quickly.......but then the Turbo kicks in and I'm off in a rush of adrenaline:p and my thoughts turn once again to turning more fossil fuels into speed.

However, I digress, if you are set on buying a new car for mostly business purposes, then there are a lot of options as all the posters have put up. You do need specific accounting advice for you own particular circumstance.

Unfortunately JIT, I don't think you'll ever get a car to go cf+ :eek: But I like you're attitude:D

[Rob G.]

With a lease you cant claim the depreciation as you (or your business) does not own the vehicle. The leasing company does.



Yes but the lease company doesn't pass on some of the cost if they can claim depreciation themselves.

Even if they did, 100% of your lease payment is deductible so effectively the same - you negotiate the price.

Leasing can be good where ownership risk remains with the Lessor.

Leasing is also good if you are considering purchasing the asset at some nominal residual value at the end of the lease for yourself or an associate.

But note luxury car leases are treated as a hire purchase for tax.

In some circumstances, leasing is more powerful than ownership.

Cheers,

Rob

[DavidMc]

I have a novated lease.

It's a complicated piece of maths to work out. Things that make it more 'worth it'.

- More expensive running costs (sportier cars, expensive tyres, brakes, suspension, 98 fuel, higher insurance and servicing)
- More KM's each year
- More expensive car

Obviously you're still spending money and it's not a way to wealth (which I'm sure you already knew).

I think it's best to view it as a way to own a more expensive car for the cost of a cheaper car, plus you're freeing up funds to use for other things. My sums showed that my $15k 1993 car I owned outright cost the same as leasing a $30k 1999 model of the same car. Also that $15k I'm not 'driving around in' could now be a deposit for an IP.

On a bog standard Falcon or Conformadore it's probably not worth the hassle.

I agree buying a $3k clanger is the best for your wealth, but as I'm getting older I have more focus on my safety. For $15k you can get a 2 year old Corolla or similar with ABS, airbags and a great crash test rating. Ideally ECS / TCS too.

[Ausprop]

I don't think we have touched on the real kicker....

you write the vehicle off to the min. the ATO allows and as there is no CGT on MVs the difference is tax free.

owning a nice car should cost virtually nothing, especially if you have a Westpac GM credit card and get your $3k discount.

[battler]

Unfortunately JIT, I don't think you'll ever get a car to go cf+

Get yourself a Taxi ;)

[JIT]

Hi there,

Thanks for the replies, it's starting to make more sense.

I'll have to look further into chattel mortgages or commercial hire purchases versus standard leases and do the maths on it and then discuss it with my accountant.

Another question, is it better to go to a dealer direct for the car you are looking for or use a particular finance company or a car finance broker? Anyone in particular?

[quoll]

We just went to the local Mazda dealer and did the best deal we could on a Mazda 2 and a Mazda 3 then sorted out the leases finance with our broker. So for about $10k per year we have cars sorted out for the next few years.

Bit of now grattification. On a crappy winter morning you know the car will start, the climate control works great and you have a safe ride to get you around.

Cheers
Graeme

[Collector]

You should also look into the STIMULUS PLAN: tax breaks.

OWNERS of small businesses will gain a special tax break if they buy new equipment ranging from computers and fax machines to cars and industrial machinery before the end of the financial year.

http://smallbusiness.theage.com.au/growing/finance/stimulus-plan:-tax-breaks-906938383.html

[JIT]

owning a nice car should cost virtually nothing

Yep, that's what I'm trying to work out!

[JIT]

I think it's best to view it as a way to own a more expensive car for the cost of a cheaper car, plus you're freeing up funds to use for other things. My sums showed that my $15k 1993 car I owned outright cost the same as leasing a $30k 1999 model of the same car. Also that $15k I'm not 'driving around in' could now be a deposit for an IP.


Yes, that's a good way to look at it.

[bene313]

You should also look into the STIMULUS PLAN: tax breaks.



http://smallbusiness.theage.com.au/growing/finance/stimulus-plan:-tax-breaks-906938383.html

I'm surprised this wasn't mentioned sooner - buy the car and get your 30% tax offset, plus the usual depreciation to 100% of the value. Effectivley writing off 130% of the vehicle for tax purposes.

[Ausprop]

I'm surprised this wasn't mentioned sooner - buy the car and get your 30% tax offset, plus the usual depreciation to 100% of the value. Effectivley writing off 130% of the vehicle for tax purposes.

I know it finishes June 30, but when does it start?

[JIT]

You should also look into the STIMULUS PLAN: tax breaks.



http://smallbusiness.theage.com.au/growing/finance/stimulus-plan:-tax-breaks-906938383.html

Thanks, my business won't open it's door till 2010!, so will have to wait and see if this gets extended.

But the added 30% is very attractive.

[JIT]

especially if you have a Westpac GM credit card and get your $3k discount.

Ausprop, what's that about, can you elaborate?

[Ausprop]

Ausprop, what's that about, can you elaborate?

there has been discussion in here about it before and I think it's GeeCee that's a big fan and changes the SV6 every year.

it's a credit card and every dollar spent earns discount off Holdens - max $3k on a commodore. it comes off after all negotiation, fleet disc etc...

so you buy say teh 60th anniv commodore for the $30k on road... beat them down to $27k or whatever, use your GST input tax credit to fund the payments initially, then end of year trade in and there should be minimal change over

[SOULFLY3]

i know im prob jumping in here without fully understanding all this topics info but is there anyone that could do a break down with number if say they were to lease a 35k hilux (95% business use)? or is it impossible without talking with accountant.

Thanks

[evand]

I disagree with this. The HP payments should be similar to the lease amount plus you get the depreciation deductions as well with HP. Depreciation is at about 9% or 10% pa i think.

So its a double bonus. Plus comm. HP has a balloon at the end if you like. You can structure it many ways to your own circumstances and benefit.

So, its very similar to a lease except you get to claim the depreciation.


Yes but the lease company doesn't pass on some of the cost if they can claim depreciation themselves.

Even if they did, 100% of your lease payment is deductible so effectively the same - you negotiate the price.

Leasing can be good where ownership risk remains with the Lessor.

Leasing is also good if you are considering purchasing the asset at some nominal residual value at the end of the lease for yourself or an associate.

But note luxury car leases are treated as a hire purchase for tax.

In some circumstances, leasing is more powerful than ownership.

Cheers,

Rob

[Cales405]

There are also differences in how GST can be claimed.

Not entirely correct

Operating Lease
No matter if you're on Cash or Accrual for GST purposes, you can only claim a portion of the GST with each lease payment.

The lessor lends the Net Amount Financed exclusive of GST and charges GST with each repayment, therefore if you are GST registered you claim the GST with each repayment at each BAS. The net repayment is deductible on your annual tax return. The ownership of the asset lies with the lessor at all times and when the lease is at the end the vehicle is returned

Chattel Mortgage/Hire Purchase
Cash - A portion of the GST with each payment
Accruals - The entire amount upfront

Chattel Mortgage: GST can be claimed upfront whether GST is set as cash or accrual as the ownership of the vehicle will be the customers from the day they purchase and the financier takes a mortgage over the vehicle. Asic will charge a mortgage fee if the owner is a company.

Hire Purchase (CHP): If GST set on cash basis, GST will be claimed as a portion with each repayment, but if set on accrual an upfront amount can be claimed. The ownership is the financiers until all monies have been paid where the ownership becomes the customers once there is no monies outstanding.

Depreciation and the interest compenent is also deductible in both Chattel Mortgages and CHPs.

Finance Lease / Loan
No matter if you're on cash or accruals, it's the whole amount upfront.


Finance Lease: Lessor finances GST exclusive and GST is payable and claimable with each repayment. The whole net repayment can be deductible. There are guidelines under the ATO's IT28 ruling with residual values to make a Lease a true Finance Lease for maximum deductibility. Ownership of vehicle is always the finance companies and at the end of the term there usually is a residual value(RV), but you can get Leases without RV. GST definately cannot be claimed upfront on a Finance Lease.

A Loan is usually just for private usage. If it is secured, it is set up similiar to a Chattel Mortgage and if unsecured, it is a straight borrow from the bank. If the car is used for business use, you would not set up as a loan.

[Rob G.]

I disagree with this. The HP payments should be similar to the lease amount plus you get the depreciation deductions as well with HP. Depreciation is at about 9% or 10% pa i think.

So its a double bonus. Plus comm. HP has a balloon at the end if you like. You can structure it many ways to your own circumstances and benefit.

So, its very similar to a lease except you get to claim the depreciation.

You cannot deduct that part of the HP payments that represents capital payments for acquisition of the asset. After all ... you are depreciating the asset as its "owner".

Leases can be beneficial in terms of low residual value if you might acquire the asset at the end but you are not sure. Its also not a balancing event if you do acquire the asset.

In uncertain economic times, it might be better to leave the risk with the lessor. This is easir with leases.

The choice is not always obvious, see how much you can negotiate out of financiers.

Cheers,

Rob

[Ausprop]

Not entirely correct



Chattel Mortgage: GST can be claimed upfront whether GST is set as cash or accrual as the ownership of the vehicle will be the customers from the day they purchase and the financier takes a mortgage over the vehicle. Asic will charge a mortgage fee if the owner is a company.


thanks so much Cales - I thought I had stuffed up by claiming the GST on cash

[ffc1883_1996]

Great thread. I offer the following observations…

On Somersoft we tend to be a little bit obsessed with interest rates at times. Therefore, I’m surprised that IRs not been mentioned so far in this thread. To me, without having done all that much research, car finance seems expensive at the moment. It’s much less expensive to draw the funds from a resi property loan.

Your thoughts?

[ynnug]

there has been discussion in here about it before and I think it's GeeCee that's a big fan and changes the SV6 every year.

it's a credit card and every dollar spent earns discount off Holdens - max $3k on a commodore. it comes off after all negotiation, fleet disc etc...

so you buy say teh 60th anniv commodore for the $30k on road... beat them down to $27k or whatever, use your GST input tax credit to fund the payments initially, then end of year trade in and there should be minimal change over

Are you subject to GST and CGT payment to the ATO when you sell your privately owned car for which you have claimed business deductions? Let's say you buy a car for 30k and depreciate it to 24k after one year (20% depreciation) and claim 3k depreciation on business expenses (50% business use). Then when you sell the car at say 28k, that should represent a profit of 4k (from the depreciated value). Do you have to pay the ATO capital gains tax and GST on the "profit" you made?

[Ausprop]

Are you subject to GST and CGT payment to the ATO when you sell your privately owned car for which you have claimed business deductions? Let's say you buy a car for 30k and depreciate it to 24k after one year (20% depreciation) and claim 3k depreciation on business expenses (50% business use). Then when you sell the car at say 28k, that should represent a profit of 4k (from the depreciated value). Do you have to pay the ATO capital gains tax and GST on the "profit" you made?

depends whcih entity sells it. You could sell the vehicle to yourself at the WDV and yes pay the GST on that amount. then can sell in your own name tax free (no CGT on vehicles). So there could be stamp duty, however if you are a personal trustee then the vehicle woul dbe in your name anyway. I know with novated leases it was easier because the vehicle was owned by the employee in the first place

essentially tho, yes you need to pay GST on the sale price and any balancing adj on the deprecaited value if being resold in your entity

[Cales405]

thanks so much Cales - I thought I had stuffed up by claiming the GST on cash

That is the only real difference between CHP and Chattel Mortgage for tax purposes and the reason being you own the asset from the day you purchase under Chattel Mortgage

[ynnug]

depends whcih entity sells it. You could sell the vehicle to yourself at the WDV and yes pay the GST on that amount. then can sell in your own name tax free (no CGT on vehicles). So there could be stamp duty, however if you are a personal trustee then the vehicle woul dbe in your name anyway. I know with novated leases it was easier because the vehicle was owned by the employee in the first place

essentially tho, yes you need to pay GST on the sale price and any balancing adj on the deprecaited value if being resold in your entity


If I own the vehicle privately, no lease, I own it outright. I just claim business deductions. Then I sell it to someone else completely unrelated to my business or me. What are the implications on GST and CGT?

[JIT]

Goog point ffc...What's car finance interest rates these days?

[ffc1883_1996]

For the simplest of car loan products, check out http://www.ratecity.com.au/car-loans/lowest-rates/

There's not much under 10%.

[Cales405]

For the simplest of car loan products, check out http://www.ratecity.com.au/car-loans/lowest-rates/

There's not much under 10%.

Rates are at their lowest. Dealerships can offer way better than 10%. Margins have come down, just dealers are able to get higher rates as car loans and credit cards haven't come down all that much, just lenders margins have increased.

[BayView]

Or just buy some old clanger for 3K and put the remainder into something useful instead of swanning about. Noice !!!

Good work Dazz.

I thought it'd be only me bangin' that drum.

Seriously, most people buy the most car they can get away with in their business because of this.

They do it because they can, and think they are getting a cheap car out of it.

I did it back in the early days when I had a decent income from the business and no brains. I know better now. A bit if delayed gratification then; would be worth another mill or so on the bottom line and cashflow; now.

It is still a business expense, you still have to come up with the money to pay the lease each month - this is a cashflow drain on your business.

And what is the single biggest cause of bankruptcies in any business? Lack of cashflow.

By all means, buy a decent car on lease. But, there's no need to get the $70k whatever, when you can get a perfectly good $20k or 25k whatever - especially in a newer business.

[JIT]

The lowest advertised car loan interest rate I found from RateCity and Cannex was from "Community CPS Australia" for 7.25% pa at a fixed rate...but not sure what the caveats are here?

This is also lower than all the other variable rates currently on offer...not sure what that means though?!

Seems that most car financing is done via Credit Unions and Building Societies, rather than Banks.

I'm thinking that for car finance it may be better to use a broker or go direct to a financier rather than using a dealer direct and using their finance people (ie. conflict of interest etc...)...what do others think about this?

And also, use the lowest fixed rate you can get...who knows how much they could jack up variable rates in the future?

Unless...you want to pay down more principal early on, then variable rates may be better for you, but I probably wouldn't be inclined to do this...I think.

I wonder if you can ''discounts'' off these standard advertised rates?

Also, I wonder if you could do interest only?!

That would be very good for a chattel mortgage or a commercial hire purchase, but it would seem pretty unlikely!

Anyone here got lower interest rates on car loans than this 7.25% pa figure?

I wonder what the trend of interest rates on car loans are...are they going to head up or down in the near future?

Could there be a sweet spot for getting a nice car at a discounted price and on competitive finance terms in the near future?!

In the context of the GFC, perhaps now is a good ''time'', relatively speaking, to buy a new car?

[Ausprop]

In the context of the GFC, perhaps now is a good ''time'', relatively speaking, to buy a new car?

you need to take a position on the direction of the AUD vs the currency of the country that the car you are considering comes from and IRs for leases.

if you see the AUD rising, you would steer clear of imports.
the GM card can be used for imported holdens remember.

if you see IRs rising then yes locking in a rate would be good

and of course the deal you can secure - with stock sitting around you should be able to get a good deal

I avoided US cars as I foresee weakness in the USD.

[Piston Broke]

I have no problem with anyone having a nice car but the whole attitude of buy now pay later, and "it's a tax deduction" dont make much sense to me.
It's a big expense, that's why it's a big tax deduction.
And what 's the point of paying $70K+ for a $50k car, that is worth less than half after a few yrs?
Why work a whole life just to pay the bank?
Sure I'm the first that aint riding in any $3k $hit box, but I see so many repoed cars at the auctions these days that a nice car only a few yrs old like a Merc C200 is around ~20k, and CLK320 ~35-40k. I seen a BMW 645Ci with low kms go for ~80k. Tons of bargains out there, as most ppl who buy them cant really afford them.
They start up or buy a busniess, have a good run, and then start believing they are successful and need a car that equals their newly aquired status.
Of course I'm of the opinion that if you cant save most of the $$ for it, then you can't afford it.

[Ausprop]

well a 645 is one thing, but I contend that if you have an ok business or job that you can drive a new commodore for very little cost, without the need for repairs and all the aggravation that old cars bring. there is also the safety factor to consider, plus surely there is more to life than driving that $3k banger? also better for the environment and creates aussie jobs (for now at least)

[JIT]

I have no problem with anyone having a nice car but the whole attitude of buy now pay later, and "it's a tax deduction" dont make much sense to me.
It's a big expense, that's why it's a big tax deduction.
And what 's the point of paying $70K+ for a $50k car, that is worth less than half after a few yrs?
Why work a whole life just to pay the bank?
Sure I'm the first that aint riding in any $3k $hit box, but I see so many repoed cars at the auctions these days that a nice car only a few yrs old like a Merc C200 is around ~20k, and CLK320 ~35-40k. I seen a BMW 645Ci with low kms go for ~80k. Tons of bargains out there, as most ppl who buy them cant really afford them.
They start up or buy a busniess, have a good run, and then start believing they are successful and need a car that equals their newly aquired status.
Of course I'm of the opinion that if you cant save most of the $$ for it, then you can't afford it.

Valid points, but this thread is really just for me to better understand car financing and to see what the extent of the costs may be after-tax.

When I have more time I will try and do a numerical comparison to put it in perspective, and also look at the opportunity cost of funds, eg. as per DavidMc's example. (Or if anyone else wants to do it, go right ahead!)

I agree with the stock-standard advice of buy a modest car with cash when you can afford it...but I'm trying to get an idea of some alternatives that may also be financially viable.

[JIT]

I've narrowed my lease options down to:

Chattel Mortgage
Finance Lease (lease and hand back at end of term or re-lease same or a new car, or purchase at end of term)
Operating Lease (bit like a finance lease, but includes operating costs)

[units4me]

I bought a new Mercedes van (50K) the other week for my business (sole trader). I paid about 20K deposit and did a chattell mortgage for the remaining 30K, because i like low repayments. I personally prefer the mort/HP option over leasing as i hate the thought of that huge balloon figure, when your eyes are on your next car. And with a lease, you never really own the car.

Interest rate through the dealer finance was about 6.5% fixed for 60 mnths, which is only slightly above home loan rates. I got a similar low rate for my Falcon a few years back. All you have to do to get a low rate is say that you will finance cheaper elsewhere, and they jump for your business. Simple, if you are seen as a low risk customer.

I guess (i'm no expert though) that with interest component, depreciation, GST refunded upfront etc, then it is prob cheaper this way, than leasing.

As for the 3K clangers, no way. I work hard and like a good work car, for many reasons, some selfish. It still costs you out of your own pocket
but much less than you might think.

[ffc1883_1996]

...I personally prefer the mort/HP option over leasing as i hate the thought of that huge balloon figure, when your eyes are on your next car. And with a lease, you never really own the car...

I personally hate making principal payments and paying off loans - particularly where the interest is tax deductible. Once a finance facility is set up, interest only (or as close to i/o as possible) is far better I reckon.

[ffc1883_1996]

I've narrowed my lease options down to ... Operating Lease (bit like a finance lease, but includes operating costs)

You should have a chat to LeasExpress. My dad and I have each used them - both of us are happy clients.

Actually, I'm an ex-client really. Their funding comes from Macq Bank so for me to take out an operating lease with LeasExpress would most likely break my new neverevereverdealwithmacquarieagain rule.

[klublok]

So in relation to GST, would you be able to claim that for a second hand car? Do they even charge GST for a second hand car?

[Cales405]

So in relation to GST, would you be able to claim that for a second hand car? Do they even charge GST for a second hand car?



Yes & Yes.

[TheDoctor]

So in relation to GST, would you be able to claim that for a second hand car? Do they even charge GST for a second hand car?

Assuming you buy the car from someone who is registered for GST.

If you buy a second hand car from John Smith down the road, then usually - no.

[BayView]

to take out an operating lease with LeasExpress would most likely break my new neverevereverdealwithmacquarieagain rule

I used to have this mentality when I was stiffed by yet another Bank.

I'm running out of Banks.

They don't care if I have a sook or not, so I've learned to get over it (them) and move forward.

So, I've decided to be a Bank whore and go with any who will give me the money I want, when I want.

My goal in life is to get soo big that my (lack of) business with them will hurt them and they will come running.

Keep dreaming and plotting.

[ynnug]

if you see the AUD rising, you would steer clear of imports.
the GM card can be used for imported holdens remember.

.

Anyone know if the GM card can be used to buy vehicles under business? That is do not have to pay GST etc? I know the terms and conditions say that to earn the points on that card you have to be an individual and earn points on personal expenses. Say I earn the points with my personal expenses and then buy the car through a business, can I use the GM card credits?

[JIT]

Hi there,

I've had a re-think on this...isn't it better to just use any surplus equity available in residential property, for example, to finance a car purchase instead of chattel mortgages/commercial hire purchases/finance leases/operating leases?

Here you have low interest rates, interest only (variable or fixed), tax-deductible loan (if the car is used for business purposes), GST refunds, depreciation, and most of all, you are not having to pay any principal down...ie. instead of paying down principal on a tax-deductible loan you can use the extra cash to pay down a non-deductible loan instead, ie. PPOR loan...?

So this way, a 55k car today would cost you at a 5% home loan interest rate, $2750 pa (excluding maintenance/insurance/petrol), before tax, and after tax at the highest marginal rate about $1200 pa...or $23 per week...(not including GST/depreciation benefits)...that's cheap isn't it?!

Say it's 110k car, that's $43 per week?!

Rough numbers of course.

[DavidMc]

Hey JIT,

Yes, it's much cheaper using resi finance.

However, I've just bought a $60k car. Would prefer to finance that and have my 60k back for a deposit on a nice IP.

I've done novated lease before and understand how they work.

After all your research, what is the main difference between these and Chattel Mortgages? It's very hard to get a straight answer on the net, thought it would be easy.


Regards,

David.

[DavidMc]

I can see on a website

"A Chattel Mortgage is another option for Businesses looking for immediate ownership with the added benefit of claiming back the GST within the BAS period of purchase."

and

Novated Lease - "This is a three way agreement between a employee, the employer and the financier. The repayments are deducted from the employee's Gross Taxable income to reduce the amount of Tax that you are required to pay"

I'm assuming under a Chattel Mortgage you can still get a fuel card to pay for all expenses and these are taken out of your pre-tax pay?

[JIT]

Hey JIT,

Yes, it's much cheaper using resi finance.

However, I've just bought a $60k car. Would prefer to finance that and have my 60k back for a deposit on a nice IP.

I've done novated lease before and understand how they work.

After all your research, what is the main difference between these and Chattel Mortgages? It's very hard to get a straight answer on the net, thought it would be easy.


Regards,

David.

David,

This thread then continued on to this one:

http://www.somersoft.com/forums/showthread.php?t=54788&highlight=business+cars

But, after finding out that cars could in fact be purchased CF+ve, I have since lost my enthusiasm for cars, and am still driving around in my old Toyota!

I'm just going to wait until I can afford the Gallardo :D!

But from memory, my understanding was that Chattel Mortgages were basically P+I loans for cars, with a ''residual value'' payment you set upfront. Eg. Car purchase price 55k, residual value 35k, 5 year term, means you pay P+I the 20k difference over 5 years, then at the end of the 5 years you have to pay the remaining 30k loan amount to take full ownership of the car, if you want to. You can adjust the residual value to increase or decrease your monthly repayments over the 5 years.

The GST refund is a one off refund of the 5k GST amount on a 55k car you get if you are self-employed or a business owner, on the first BAS you do during the car purchase period.

Being P+I, it's not cheap to service, and that's my main problem with it. And only the interest is tax-deductible (if used for business use, and it depends on the % you use it for) of course. But, you can depreciate the car, and this non-cash tax-deduction is the major benefit. The now obsolete 50% investment allowance made this especially so, and hence you got CF+ve cars.

As for fuel cards, I am not sure about this, but I don't believe Chattel Mortgages are available for employees, so not sure about taking it out of your pre-tax income. A contractor/business owner would just pay all car expenses on a credit card and then claim the % of business use as a tax deduction.

So... I much prefer IO loans via residential equity LOCs for this sort of thing. It's way cheaper, but at the expense of using up highly leveragable equity.

If you have plenty of LOCs sitting around doing nothing, and the car purchase price is only a small portion of this, then I would consider it. I probably would even do this over using cash savings upfront.

As for Novated Leases, to be honest, I don't know much about these. I thought you had to be an PAYE employee for this, and as I am self-employed now I have not looked into this.

Maybe you could explain how Novated Leases work?

Hope this helps.

[Cales405]

Lease Agreements mostly are used to keep a vehicle off a business' balance sheet.

As the vehicle is owned by the financier, the only place this will show up on your financials is as a rental on your profit & loss sheet

Whilst some comments on here state a CHP is better as you claim repayments, depreciation and GST, you need to remember that you can only claim the interest component of your repayment (not the whole repayment) whereas under a Lease agreement you claim the whole repayment as long as the residual fits with in the ATO's guidelines. (ie minimum 28.13% RV on a 60 month term)


The deductions end up being very similiar at the end of the day.

The choice is whether you want the vehicle to be an asset of your business or not.

[DavidMc]

Cales has summed it up quite well.

I've just gone with another novated lease. My calcs showed that a $60k car using resi finance (6.x%) vs a Novated Lease (9.x%) works out pretty similar after all the associated tax advantages.

The other main difference for me is that with a Novated Lease I can use a Motorpass fuel card and don't have to post receipts etc. The CM you had to do all the BAS stuff etc and I just wanted the simplest option (even if it was slightly worse off $ wise, seems neck and neck anyway).

Now, and extra $60k to play with... :) Maybe Brisbane.

[DavidMc]

As far as how one works, it's a P&I loan + expenses all paid out of pre-tax dollars.

Then you pay FBT on top of that which is a function of how many KMs you do. More KMs the better.

The tax office has minimum balloon amounts at the end of each lease depending on the lease length.