Structuring your car ownership

We all want a brand new car and the car salesman agrees we need one, however, being aware of the small differences in the how you finance the purchase can significantly change your tax and GST implications.

Should I pay cash or finance the purchase?

Paying cash outright for the car is the simplest method of funding the purchase and means that there are no monthly payments or interest to worry about.  However, if you don’t have a lump sum of cash available you will need to look at finance.  Many people who can afford to pay cash still choose to use a finance method as there are often better uses for the cash that pay a higher return than the interest you pay on a loan.

If you choose to borrow to finance the loan there are a number of options available.

Car Loan

A secured car loan allows you to take ownership of the car at the time you purchase it.  The finance company takes an interest in the car via security (to cover default on the loan). Once the loan is repaid the security is removed.  Assuming you are using the car for business use or in the course of your employment you can claim the interest and depreciation as a tax deduction (based on business log book percentages).

Home Loan

It can be tempting to draw down on equity in your home via your mortgage to fund your car purchase as the interest rates are lower. However, you need to consider the repayments are now spread over a longer period (e.g. 20 years), also you can lose any tax deductibility on the interest as you mix deductible and non-deductible purposes.  If you are planning on financing the purchase then a separate loan or other financing option is preferred.

Chattel Mortgage/Finance Lease/Commercial Hire Purchase

Other financing options vary the terms slightly.  A chattel mortgage is the most similar to a loan as the legal ownership of the vehicle transfers at the time the mortgage is entered into. As above, you will be able to deduct your depreciation and running costs as normal. If you are registered for GST you can claim input tax credits upfront on the total cost of the car (subject to the luxury car limit).

Finance lease and commercial hire purchase differ to a chattel mortgage as the ownership is retained by the Finance Company and transfers at the time the liability is fully extinguished.  There are various different options on term length and balloon payment at the end.  With a finance lease you generally claim the payment as a tax deduction rather than the interest and depreciation.

Novated Lease

A novated lease is an agreement between your employer, your financier and yourself. Effectively, you enter into an agreement with your financier to purchase the vehicle, you then enter into a second agreement in order to transfer some of the operating obligations to your employer. In doing so, you agree to pay a fixed rate (partially from pre-tax dollars) from your salary to cover both your lease obligations and some of your operating expenditure such as fuel and maintenance costs.

As the main advantage is a reduction in your taxable salary, employees on higher tax brackets find this more suitable than others.

How can William Buck assist?

As you can see there is not a ‘one type fits all’ option and we urge you to get advice before entering into any arrangement to ensure the option is the best for you and your personal circumstance.

Please contact William Buck to ensure you understand the differences and what you are committing to before signing on the dotted line.

Structuring your car ownership

Belinda Hudson

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