Finance

Car Loans – Your Finance Options

Looking to buy a car? If so, you may already know that there are far more options available to you than simply handing over the cash. We look closely at six options available to new car buyers:

1. Hire Purchase Agreement
2. Lease Agreement
3. Novated Lease Agreement
4. Operating Lease Agreement
5. Chattel Mortgage
6. Sale & Lease-Back or Sale & Hire-Back

1. Hire Purchase Agreement

Description: A Hire Purchase arrangement is an agreement to purchase a vehicle subject to payment terms to the finance company. You will automatically own the goods when you pay the final payment.

Key Features:
Term: The term of finance agreement can be from 1 – 5 years.

Residual/Balloon: You can choose to have a balloon payment as the last payment of your finance agreement. This balloon payment is usually between 10% – 40% of the cost price. A balloon payment allows for lower monthly payments and leaves you with more working capital to run your business.

Deposits: Deposits are optional. You may, however, choose to trade in an existing vehicle or put in a deposit to reduce the amount to be financed. This, in turn, reduces your monthly repayments.

Owner of the Goods: The financier owns the goods (i.e – retains legal title) during the term of the agreement. You automatically secure ownership upon payment of the final installment.

Accounting Benefits: The amount financed is inclusive of GST, however, your monthly repayments are not subject to GST. You can claim the interest component of all repayments.* The depreciation of the goods is fully tax deductible.*

The goods you purchase become an asset that shows on your balance sheet for your business. The goods will also be a contingent liability until the end of the finance agreement. However you may be liable to pay fringe benefits tax (Please refer to the ATO at: www.ato.gov.au/businesses for further information)

*providing goods are used 100% for business purposes

2. Lease Agreement

Key Features:
Term: The term of finance agreement can be from 1 – 5 years and must be in accordance to ATO Guidelines.

Residual/Balloon: You must have a residual payment as the last payment of your finance agreement according to Australian Taxation (ATO) Guidelines. This varies between 25% to 65%. This amount usually represents the approximate value of the goods at the end of the lease. A residual payment allows for lower monthly payments and leaves you with more working capital to run your business. You may refinance this residual value at the end of the contract (depending on the finance company).

Deposits: Deposits are not required. The full purchase price must be financed.

Owner of the Goods: The finance company retains legal title during and after the term of the agreement. Legally, the vehicle should be returned to the finance company at the end of the term. The finance company will then auction the goods and you must pay for any shortfall between the sale price and the agreed residual value. However, in most cases, the finance company will usually consider your offer to purchase the vehicle at the agreed residual value at the end of the lease term. Title of the goods will then be transferred to you as the new owner.

Accounting Benefits: The monthly rental payments are 100% tax deductible, provided the goods are solely used for business purposes. The amount financed is exclusive of GST (the finance company covers this cost as they are purchasing the goods for you). The monthly rental payments are subject to GST and stamp duty. The residual value and early termination are also subject to GST. The goods need to be shown on the balance sheet as both an asset and liability. However you may be liable to pay fringe benefits tax (Please refer to the ATO at: www.ato.gov.au/businesses for further information).

3. Novated Lease Agreement

Description: A Novated Lease is specifically designed for individuals who have the option of receiving a car as part of their salary package.

Key Features:
Specific Benefits: The lease is taken out in the employee’s name not the employer. The employer enters into an agreement making them responsible for satisfying the lease repayments, normally deducted as part of the employee’s salary package. If the employee resigns from this employer, the lease transfers with the employee and the employer is cleared from any further financial obligation or unwanted vehicle.

Term:The term of finance agreement can be from 1 – 5 years and must be in accordance to Australian Taxation Office Guidelines (ATO).

Residual/Balloon: You must have a residual payment as the last payment of your finance agreement according to ATO Guidelines. This varies between 25% to 65% of the cost price of the goods). This amount usually represents the approximate value of the goods at the end of the lease. A Residual payment allows for lower monthly payments and leaves you with more working capital to run your business. You may refinance this residual value at the end of the contract (depending on the finance company).

Deposits: Deposits are not required. The full purchase price must be financed.

Owner of the Goods:The finance company retains legal title during and after the term of the agreement. Legally, the equipment should be returned to the finance company at the end of the term. The finance company will then auction the goods and the employer must pay for any shortfall between the sale price and the agreed residual value. However, in most cases, the finance company will usually consider the employees offer to purchase the goods at the agreed residual value at the end of the lease term. Title of the goods will then be transferred to the employee, the new owner.

Accounting Benefits: The monthly rental payments are 100% tax deductible, providing the goods are solely used for business purposes. The amount financed is exclusive of GST (the finance company covers this cost as they are purchasing the goods for the employee). The monthly rental payments are subject to GST and stamp duty. The residual value and early termination are also subject to GST. Employers can attract employees by offering a vehicle as part of a remuneration package, without having it appear on their balance sheet. However you may be liable to pay fringe benefits tax (Please refer to the ATO at: www.ato.gov.au/businesses for further information).

4. Operating Lease Agreement

Description: An Operating Lease (also referred to as Rental Agreement) is a preferred method of financing high depreciation, short life span vehicle’s / equipment such as phone systems, computers, delivery trucks or office equipment. The finance company purchases the equipment and rents it to you for an agreed payment schedule over a fixed term. Whilst similar to a Finance Lease, an Operating Lease has far greater flexibility at the end of the term.

Key Features:

Specific Benefits: An Operating Lease is flexible during and after the term of the agreement. It provides the special ability to upgrade to new technology through a simple variation of your existing contract (certain criteria applies). This variation can be implemented during the initial term of the agreement. You can add in pieces of equipment and if required replace or upgrade equipment. You can choose to have maintenance software installation and other intangible items included in the rental agreement.

Term:The term of finance agreement can be from 1 – 5 years and must be in accordance to ATO Guidelines.

Residual/Balloon: You must have a residual payment as the last payment of your finance agreement according to ATO Guidelines. This residual value is determined by the finance company and the finance company is responsible for paying it. The residual values are generally not disclosed to you.

Deposits: Deposits are not required. The full purchase price must be financed.

Owner of the Goods:You have possession and use of the equipment, however, the finance company shoulders most of the risk of ownership.

Expiry of Rental Period: At the end of the Rental Period, you can either:

• Return the goods to the finance company, without any responsibility for loss incurred by the finance company for the resale.
• Purchase the equipment at a fair market value (usually very low due to the high depreciation of the equipment).
• Re-rent the goods at a lower rate for a further term.

Accounting Benefits: Rental payments are 100% tax deductible because they are treated purely as an operating expense – the equipment must be used solely for business purposes. Rentals do not appear on the balance sheet, therefore there is no contingent liability. Rental payments are subject to GST, with the amount financed being exclusive of GST. However you may be liable to pay fringe benefits tax (Please refer to the ATO at: www.ato.gov.au/businesses for further information).

5. Chattel Mortgage

Description: A Chattel Mortgage or Bill of Sale arrangement is a loan agreement similar to a standard consumer loan (i.e – you are not hiring the goods or leasing the goods from the finance company, you OWN them). Youborrow funds to purchase the car / vehicle and provide security for the loan by way of a mortgage over the goods. A Chattel Mortgage, unlike a lease or Hire Purchase Agreement, gives you immediate ownership of the asset from the beginning of the loan.

Key Features:

Term: The term of finance agreement can be from 1 – 5 years.

Residual/Balloon: You can choose to have a balloon payment as the last payment of your finance agreement. This balloon payment is between 10% – 40% of the cost price. A balloon payment allows for lower monthly payments and leaves you with more working capital to run your business.

Deposits: Deposits are optional. You may, however, choose to trade in an old vehicle or put in a deposit to reduce the amount to be financed. This, in turn, reduces your monthly repayments. Owner of the Goods:Ownership remains with you throughout the term of the loan. However, the vehicle is mortgaged to the finance company. The mortgage is discharged after the final payment has been made and you retain the equipment.

Accounting Benefits: You can elect to pay the GST portion of the invoice price from working capital or fund it as part of the loan amount (the loan can be structured so that when the income tax credit is received, from your next BAS lodgement, it is repaid off the loan to reduce the debt). The interest components of all repayments are fully tax deductible.* The depreciation on the goods are fully tax deductible.* The goods youpurchase will not show as an asset or contingent liability on the balance sheet for your business. A Chattel Mortgage attracts added upfront fees and varies between the different finance companies. However you may be liabletopay fringe benefits tax (Please refer to the ATO at: www.ato.gov.au/businesses for further information).

*providing goods are used 100% for business purposes

6. Sale & Lease-Back or Sale & Hire-Back

Description: Quite simply, if you have purchased a vehicle for cash, but for whatever reason would now like to have it financed, this is a great option.

Essentially, the finance company will purchase the vehicle from you and lease it back to you via a Finance Lease. The major advantage is that you get a return of your working capital (cash) to your business. Sale and lease-back can only be arranged within 90 days of the initial transaction.