Car Leases...Tax-Effective?

[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]

Car Financing

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.