If your business needs vehicles, one of the first decisions is generally how to finance them.
Novated leases and chattel mortgages are common ways for Australian businesses to achieve this – as an alternative to purchasing a fleet.
Both chattel mortgage and novated leasing can be the right choice in different circumstances – but which one is best for your business?
For businesses, it’s important to understand how each option can affect the company’s balance sheet, tax liabilities, tax exemptions, vehicle ownership, and cash flow.
What is a Novated Lease?
In a novated lease, an agreement between an employee, their employer, and a vehicle lease company is forged, allowing an employee to lease a vehicle through their employer. Payments are made by the employer who later deducts the amount from the employee’s pre-tax income. Usually, no additional cost is incurred by the employer since the lease company does all the paperwork needed for the contract.
Many companies offer this instead of buying a fleet of cars. They don’t own the cars but simply act as a conduit between their employees and the lease company. If an employee resigns or in any way becomes unaffiliated with their employer, the employee gets the vehicle along with all obligations formerly assumed by their employer under the agreement.
Vehicles acquired through novated lease as part of their employment benefits may be subject to fringe benefits tax (FBT), giving the purchasing employee tax savings. FBT is also deducted from pre-tax salary.
Novated lease is only applicable for salaried employees and businesses who want to put in salary packaging as part of the benefits of working for them. If you’re employed and you want to own a car for personal use, check if your employer is offering options for a novated lease. Novated leases can save employees money because their payments come out of their pre-tax income.
Advantages of a Novated Lease For Employees
- Provides major income tax savings. You get to enjoy lower tax rates in paying the lease compared to spending your post-tax income on running costs.
- Lower repayments due to GST exclusion made possible by the leasing company thru Input Tax Credit (ITC) application.
- May get discounts if the employer is acquiring a fleet of vehicles using the same scheme.
- Since it’s not part of the company fleet, you get more flexibility in choosing which vehicle to acquire.
- The vehicle is yours alone and your employer doesn’t have a say on how you use it.
- You hold the contract, and it can be brought to a new employer in case you become unaffiliated with your former employer.
- Payments have a fixed rate for the duration of the lease.
- Lease terms are flexible from 1 to 5 years.
- More flexible lease residuals.
- Offering salary packages under this type of leasing program is a way to raise the salaries of your employees without any significant cost to your business.
- It can be an effective way to get company vehicles compared to acquiring and organizing a fleet of cars. There are no residual risks often present in owning a large volume of vehicles.
- Employer doesn’t need to take responsibility for vehicle risks because they don’t own the cars.
- Vehicles acquired through this process aren’t written on the balance sheet – they’re neither assets nor liabilities.
- Make business through commissions and other service fees.
What is a Chattel Mortgage?
In a chattel mortgage, a Business Owner applies for a loan from a financing company to purchase a vehicle. The financier secures the loan and obtains the chattel on behalf of the business owner. The business owner then pays the mortgage fees, inclusive of the added interest rates, to the financier until the loan is fully repaid.
Ownership of the chattel is given to the business owner from the time of acquisition. Once the loan is completely repaid, the business owner receives complete rights to the vehicle, cleared from any security interest. The business owner can then do what they want with the car like putting it in a trade-in for another model.
What makes chattel mortgage different from other lease options is that GST is only paid upon down payment. Regular monthly and “balloon” payments are excluded from GST.
Advantages of a Chattel Mortgage For Business Owners
Using the chattel for business purposes has its advantages which make chattel mortgage a popular vehicle acquisition option for businesses. Here are some of its benefits:
- Mortgage terms are flexible from 1 to 5 years.
- You can choose to pay a balloon payment to better manage the monthly dues you need to pay for.
- Interest rates and monthly repayments are fixed, giving purchasers a good view of how much the loan will cost them each month in the upcoming years. This makes budgeting easier for customers.
- Many financiers offer cash deposit or trade-in options on chattel mortgages.
- Vehicles prepared for business use are candidates for tax deductions.
- Monthly and balloon payments are exempted from GST.
- Interests and depreciation values may be claimed for tax deductions and buyers can immediately claim the GST from the vehicle’s price tag.
It’s recommended you consult your accountant to get a better idea of the tax implications and savings for your business so that you can choose the right option for your business.