Have you ever been confused by the different options available in providing vehicles to your staff? Do you want to provide a company vehicle or would you rather have no liabilities on your books? Whether it’s for business or private use, business owners can find themselves overwhelmed by the information and options available. Below is a quick summary on some common vehicle options available to an organisation.
A chattel mortgage is simply a business obtaining a finance loan for a car and is considered a liability on your company balance sheet. However, ongoing fixed repayments are exempt from GST and the depreciation and interest on the loan are tax deductable. A residual payment may be required at the conclusion of the term, in which a business has the option to trade in, pay-out or refinance the residual amount into another term. A chattel mortgage is used predominantly for business use.
Unlike a Chattel Mortgage, the bank buys the vehicle instead and simply rents it to a business. Ongoing fixed costs cover all finance and running costs. An operating lease does not appear on a company balance sheet therefore it will not affect your debt ratios. Having said this, it is the responsibility of the business to pay for the ongoing fixed rental costs of the motor vehicle. Upon the end of the term the vehicle can simply be handed back without the business having any responsibility for the residual amount outstanding on the vehicle. An operating lease is also used mainly for business use.
Arguably the easiest way to provide vehicles, a novated lease allows employees to package all their vehicle finance and running costs in a tax effective way through their salary. It is not considered a liability to a company and the employee takes the lease with them should they leave your organisation. On the employer side of things, as this is a staff benefit it does incur Fringe Benefits Tax (FBT), however the FBT is offset through a post-tax deduction in the employee’s pay. This ensures that there is zero cost to an employer for providing this benefit to staff. A novated lease can be used for a combination of business and private use, or 100% private use.
A finance lease is where the bank buys the vehicle and leases it to a business. Predominantly the vehicles leased are commercial vehicles such as vans and utes. Repayments are tax deductable like they are in a chattel mortgage however the GST is payable on all the costs. As part of a finance lease agreement you can choose to pay for the entire cost of the vehicle over the term, including the interest, or you can have a residual at the end of the term which would bring the overall payments down for the duration of the lease. A finance lease is used mainly for business use.
No matter how big or small your business is, it’s important to understand the options available to you, especially the ones that will be the most cost efficient for your business. More and more companies are attempting to remove vehicles from their balance sheet. In some cases this is unavoidable, in others there is strong ‘fuel for thought’ in ways to save your bottom line, pardon the pun.