04 May 2023

Financing motor vehicles

One of the most common decisions facing business is how to finance and account for the acquisition of a motor vehicle. There are numerous ways of doing so, with each resulting in differing accounting, taxation and GST treatment.

OPTIONS
How should you go about purchasing a vehicle? While it may seem a relatively straightforward question, there are numerous ways of doing so. Some of the more common methods are:

• Outright purchase
• Lease
• Hire purchase, or
• Chattel mortgage.

Outright purchase
The advantage of purchasing a vehicle outright, as opposed to financing the acquisition of the vehicle, is that there will be no ongoing costs of finance. This is a real benefit now that interest rates are on the rise. On the downside, the outright purchase of a vehicle can impact greatly on the cash resources of an entity when those funds may be better utilised elsewhere. It is far easier to obtain finance for the acquisition of a vehicle than it is for the acquisition of trading stock. Care should therefore be taken not to cripple your business’s cashflow if considering an outright
purchase.

Lease
Rather than choosing to acquire a vehicle outright, your business may elect to finance the acquisition. The central issue that surrounds any form of financing, and how it is to be accounted for, is whether the person providing the asset under the finance arrangement is the legal owner of that asset. This issue goes to the heart of how the finance transaction is to be treated and is often the subject of ATO scrutiny.

The ATO has warned taxpayers about the trap of claiming deductions for what appear to be lease payments when in fact the finance arrangement is a hire purchase or similar type of transaction. The only way to identify the difference is to read the terms and conditions of the finance agreement.

The ATO will consider a finance arrangement to be a lease when:

• there is no option to purchase the vehicle written into the agreement, and
• the residual value reflects a bona fide estimate of the vehicle’s market value at termination.

If these two conditions are not met, the ATO considers the finance agreement to be a  hire purchase or other instalment type agreement.

Under a leasing arrangement, the lease payments are a deductible amount to the extent the vehicle is used for income producing purposes, and the financed sum is not typically booked on the balance sheet of the entity.

Hire purchase
This is simply another form of finance. Its tax and GST treatment however is vastly different from both that of leasing and acquisition by chattel mortgage. As a result, this form of finance needs to be considered on its own merits.

Financing motor vehicles cont
In essence, a hire purchase arrangement is an agreement to purchase goods by instalments. The term hire purchase is defined as:

a contract for the hire of goods where:

1. the hirer has the right or obligation to buy the goods; and
2. the charge that is or may be made for the hire, together with any other amount
   payable under the contract (including an amount to buy the goods or to exercise an
   option to do so), exceeds the price of the goods; and
3. Title in the goods does not pass to the hirer until the option to purchase is exercised; or iv) where title in the goods does not pass until the final instalment is paid”.

Unlike a lease, where there is no obligation to acquire the goods at the end of the instalment period, a hire purchase arrangement provides for this obligation and as such the goods will be eventually owned by the purchaser.

Chattel mortgage
A chattel mortgage from the perspective of recording the asset purchase and recognising the liability is identical to that of a hire purchase arrangement. The difference between a chattel mortgage and other forms of finance such as hire
purchase and lease comes when dealing with the GST consequences.

Not sure? Please contact us if you would like to discuss your options and the tax consequences.

Federal Budget -what to watch out for cont

On the face of it, lowering the 32.5% tax bracket to 30% and removing the 37% tax bracket altogether seems like a big win for middle and upper-middle income earners. But it will actually be a much bigger win for higher-income earners, in dollar terms.  For example, an individual who earns

• $75,000 will be better off by $750 per year compared to now
• $125,000 will be better of by $2,225
• $200,000 will be better off by $9,075

Low and middle income tax offset (LMITO) replacement?
This $1,500 tax offset ceased from 1 July 2022. The LMITO was introduced by the former Coalition government in 2018. It was only meant to be paid out once but was twice extended due to the COVID- 19 pandemic. We will wait until Budget night to see what, if any, alternative tax relief is offered to low and middle income earners, or indeed whether the LMITO is reinstated. If not, then low-income earners may face an increased tax liability of up to $1,500 when upcoming 2022/23 tax returns are lodged.

CGT concessions trimmed?
While it’s unlikely the CGT main residence concession on the family home will be reduced, the 50% CGT discount for other investments held more than a year could be partially on the chopping block for some people. It’s possible to imagine a reduction in the discount for capital gains over a certain threshold – say $3 million, in line with the threshold for the recent increase to superannuation earnings – limiting the
impacts to a smaller, wealthier cohort of individuals.

MORE INFORMATION
In the days following, please contact us if you have any questions around how the Budget may impact your business, investments, or you as an individual.