Best Car Finance Options?
Can’t tell your novated lease from your CHP? Need to know the difference between a chattel mortgage and a lease? The best car finance structure depends on your financial situation.
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Great for maximising cost-effectiveness and tax-effectiveness of car ownership
Excellent for employers to incentivise key workers
Easier than you think to set up - and hassle-free to operate
Novated leases are a tremendous way to put your pre-tax income to work and help you buy your next vehicle. Also called ‘salary sacrifice’ or ‘salary packaging’, a novated lease allows you to acquire your next vehicle GST-free, even if you are not registered for GST.
Novated leases are suitable for most Australian workers (they’re not just for high fliers) and the vehicle can even be for 100 per cent personal use. In other words, these are not ‘company cars’.
Novated leases are a three-way arrangement between employees, an employers and financiers. The employee agrees to ‘sacrifice’ some of their gross (pre-tax) salary to pay for the vehicle, the employer facilitates this as a payroll deduction, and the financier handles the administration.
It’s very simple to arrange a novated lease, and it's a great way for employers to reward employees at a negligible cost to the business. Novated leases even reduce the employee’s taxable income.
There’s a significant FBT benefit if the vehicle is used mainly for private purposes. The government merely assumes 20 per cent of the vehicle’s use is private, and they charge you FBT on that. The remaining 80 per cent of use (even if the vehicle is for 100 per cent private use) is deemed to be GST-free. This is why a novated lease is, for many employees, the most cost-effective and tax-effective way to acquire a new car.
Suits business vehicles with high 'business' use
Claim full GST input credits in first BAS
You own the vehicle from day one
Chattel mortgages are generally financial instruments for business vehicles, as there are significant tax deductions available.
Chattel mortgages are especially attractive to businesses registered for GST, especially if the vehicle is used for predominately business purposes. The full GST input tax credits on the purchase price of the vehicle can generally be claimed in full in the BAS following the purchase.
The name is unusual, but oddly relevant. The ‘chattel’ refers to the vehicle, and the mortgage is the legal instrument that provides the lender with security over the loan.
Unlike the finance lease (below) the customer owns the vehicle from day one. (Much like a mortgage on a home.) Terms are generally from two to five years, and ‘residual’ or ‘balloon’ payments (ie lump sums payable at the end of the contract) are incorporated into the structure of the agreement. These help to keep the payments low.
Suits business vehicles with high 'business' use
Essentially a rental arrangement
Hand back or buy at the end of the term
Finance leases are essentially formalised rental agreements. The financier purchases the car on your behalf and then leases it to you. The repayments are, essentially, rental payments.
At the end of the term, you might have the option to purchase the vehicle for a lump sum (residual value). Alternatively, you might choose to give the vehicle back, or re-finance the residual and continue leasing the vehicle.
Generally, a finance lease suits a business vehicle (with at least 50 per cent of the use for business purposes) with terms ranging from two to five years, and incorporating balloon/residual amounts.
Other features of the finance lease include high tax deductibility, and no GST on the purchase price (because the financier claims the tax credits direct). Again, the vehicle is the security over the finance.
COMMERCIAL HIRE PURCHASE
Less attractive than chattel mortgages because of 2012 GST tax law changes
Commercial hire purchase, or CHP, was generally suitable for business vehicles, again with two- to five-year terms and a range of balloon payment options.
As the name implies, the financier purchases the vehicle on behalf of the customer and then hires it to the customer. At the end of the term, upon payment of the residual, the customer officially ‘purchases’ the vehicle and owns it. CHP offers high tax deductibility. You claim the GST component of the payments incrementally, as they are made, over the term of the agreement.
However, significant changes to the GST treatment of CHP agreements were made on 1 July 2012, making CHP significantly less attractive to individuals with a car allowance, and potentially less attractive to businesses. This has meant a decline in the popularity of CHP, commensurate with a rise in the popularity of Chattel Mortgages (which weren’t subject to the same changes in GST treatment) especially to individual vehicle buyers.
CAR LOANS & PERSONAL LOANS
Suit individuals who can't claim vehicle tax deductions
Balloon payments possible
Terms up to 10 years
Car loans and personal loans are generally for people who can’t claim the vehicle as a tax deduction - but they can provide tax deductions for cars used in business. (In the latter case, however, some of the other structures, above, might be better.)
These are merely conventional loans, with the main difference being that in a car loan, the car is used as the security over the finance, whereas a personal loan is often unsecured (or secured by other assets, such as real property).
Balloon payments are available, and the term of the loan can be up to 10 years.
Personal loans are common for old or low value vehicles, but are often relatively expensive.
Car loans are generally used by individuals who don’t have the option of salary packaging (novated lease) and are cheaper than personal loans because the finance is secured by the vehicle. This reduces the lender's perceived risk, and hence the interest rate is lower.
The above information is general in nature only. As with all finance arrangements consult a qualified advisor and consider carefully your own circumstances before signing a contract or entering into any other agreement.