So you’re ready to buy a car, what about financing? With a large variety of vehicle finance products available it's important to take into account tax efficiency. You don't want to overpay on your tax return, so let's explore the most popular options available when buying a brand new or second-hand car.
The three most popular options for financing privately or for commercial use are:
A chattel mortgage is a commercial finance product where a financier lends the money to buy a car and the customer makes regular repayments.
The business assumes ownership of the vehicle but the financier has a ‘mortgage’ over it until the loan is paid, including any balloon payment.
Using a chattel mortgage for vehicle finance has several associated tax benefits, these include:
This type of vehicle financing is best for sole traders, a small business, or partnerships using the cash method of accounting. Why? Well, GST is only applied to the vehicle’s purchase price, meaning the business claims it back on that price upfront. It's not applied to repayments or balloon payments.
A finance lease is a form of vehicle finance that allows a customer the use of a commercial vehicle or car while enjoying all the benefits of ownership. However, technically the financier owns the car until you finish your lease term and make the necessary residual payment.
Obtaining a finance lease for vehicle purchase has several tax benefits including:
A finance lease allows you to preserve your working capital and fixed payments allows for easy cash flow management. This is generally suited towards sole traders, partnerships and companies who are registered for GST and wish to claim back the GST on a monthly basis without obtaining immediate ownership of the asset.
A novated lease is a type of vehicle financing used with salary packaging. Your employer pays for your car lease and car running costs out of your salary package through a combination of pre-tax and post-tax salary deductions. This type of finance isn’t used for business vehicles but for employees. It’s often a more tax-efficient way to purchase a new vehicle, as while it isn’t a company car, the car is treated as such.
The main tax benefits a novated lease provides are through:
There’s a common misconception that novated lease is only worth it for high flyers, but that’s not true. It’s a form of financing that can suit a wide range of car buyers and users - regardless of how much money you’re earning. Even on a modest salary, reducing your taxable income equals paying less tax. It’s also a worry-free path to car ownership that’s ideal for people that need an affordable and convenient way to buy a new or used car every 1 - 5 years.
If you have an annual turnover below $500 million, you can claim deductions for amounts of $150,000. Claims can be made for new assets at the end of the financial year (new vehicles), used assets (e.g. second-hand cars), or purchasing equipment. While this is cost-effective, it depends on your business threshold, your tax status, and if the asset’s purchase date is within the right period of time. Look at the Australian Taxation Offices' website for more information.
There you have it, our quick guide on the most tax effective way to buy a car - as always, please consult a tax professional for advice specific to you and your situation. If you need further assistance or have already made up your mind and ready to obtain finance, get in touch with our car finance experts here at Driva today on 1300 755 494.