Residual Value
Every car lease has to contain a residual, the residual is the lump sum owed to the financier at the end of a loan’s term and is expressed either as a dollar value or a percentage of the amount borrowed. The residual value is tightly controlled by the ATO and must reflect what the vehicle value at the end of the finance term. Unlike and Hire purchase or a chattel mortgage it cannot just chosen to suit your payments or cash flow or simply be nil/nothing at the end. To sum up a simple car lease is not as common as its name and is the least type of business car finance used with sole traders, partnerships or small business owners, unless you’re big business, publicly listed company or government entity you would most likely favour a fully maintain lease which we will go into detail in the next...
read moreCar Lease
Further on our series on car finance we come to one of the most well- known type of funding called “The Car Lease”. Believe it or not most people say and think they have a “Car Lease” when in fact they have a Hire Purchase, Chattel Mortgage, which is very popular. Car leasing is when the car is for business use and carries certain tax benefits, making it an attractive option for some. If the car is for private use there is no point in leasing. The costs can be about the same as for a car loan but the exit penalties are much higher and interest is calculated in an old fashioned way. Which means any overpayments made will not reduce the total interest cost. GST is charged on the monthly lease payment and on the residual value at the end of the lease. Where the customer is registered for GST, they can claim some or all of the GST contained in the lease payment and the residual value as an input credit on their next Business Activity Statement....
read moreCommercial Hire Purchase v Chattel Mortgage
As a follow-on from last month’s newsletter, this month we focus on Commercial Hire Purchase v Chattel Mortgage on Motor vehicles. What is a Hire Purchase? Hire purchase finance is an agreement between you and the lender to acquire a motor vehicle for your business. During the hire period, the lender legally owns the car and you pay regular instalments to the finance company. For tax purposes you can claim depreciation, running costs and interest paid, against your business income. When you pay off the loan in full, legal ownership is then transferred to you. What is a Chattel Mortgage? Chattel mortgage is essentially a mortgage over goods to be financed. Chattel mortgage is classed as a cash sale in that the goods automatically become your property on purchase and the finance company takes a mortgage over the chattels. Just as a hire purchase you can claim depreciation, running costs and interest paid, against your business income. The chattel mortgage allows businesses to claim the full input tax credit from GST incurred expenses immediately (next BAS statement). Those using their motor vehicles for business purposes can take out a hire purchase loan or chattel mortgage but will have to keep a log book and document the percentage of the vehicle use that is for business, which is tax-deductible. The terms of both products are essentially the same, including the balloon payment at the end, but the chattel mortgage has overtaken popularity over hire purchases since the introduction of GST and the Business Activity Statement (BAS). Here’s the twist As of July 1 2012 new GST rules have come into play. Customers will now pay GST on the interest charged for the hire purchase term and this GST is payable at settlement. Of course, as long as you are registered for GST and the asset being purchased is for business use, then this GST will be claimed back as an input tax credit on the next BAS so the net effect is nil. The other important change that came into effect is that the GST can be claimed back immediately even for customers on cash accounting. Previously, if a client is on cash accounting, then the GST paid for an asset on hire purchase must be claimed progressively over the term of the hire purchase in proportion to the principle reduction made with each payment – in other words, an accountants worst...
read moreNovated Lease
This month we focus on the Novated lease and how savvy employers and employees are using it as a tool to negotiate a salary package, with winners on both sides. Novated leasing is growing in popularity and in many cases is the only choice made available to employees wishing to have a car as part of their employment package. But be aware that this is only available at the employer’s discretion. What is a Novated lease? A Novated lease is salary sacrificing to purchase a car for private use only. Under the terms, an employer agrees to make the car repayments out of a worker’s pre-tax salary. What taxes are imposed? Fringe benefits tax (FBT) is payable but the good thing is the FBT is less than the income tax that would have been paid. (Minimising your tax) Is a Novated lease for everyone? The short answer is NO. “If you’re not doing many kilometres and you don’t have a reasonability high income, It’s probably not going to work for you, because the income tax you’d save would be outweighed by FBT . However higher earners and high-mileage drives can do you very well. What happens at the end of the lease term? A Novated lease always has a balloon payment at the end, which is tightly administered by the Australian Tax office. The ATO sets certain sums as minimums as borrowers need to avoid a bill greater than the car’s worth at the end of the lease. Why is it good for the employee? Usually if you are given a car as part of your employment package you have no choice of what you drive. It may have done many kilometres and previously been mistreated by former grubby employees. With a Novated lease the employee has a choice of which vehicle they drive and to top it off they get equity in their motor vehicle investment. What if the employee leaves their job? This is the best part for the employer, its portable so if the employee leaves the job they take the car and the debt with them. No more having a car sitting around costing money with no one to drive...
read moreAustralia and the USA – The Fiscal Cliff
Here we are in 2013 – even before the year began (late last year in fact) and to be more precise, three hours before the midnight deadline on January 1, the US Senate agreed to a deal to avert the ‘fiscal cliff‘ (a ‘political tripwire’ set in place by Politicians where the position is such that the rate of money flowing out is greater than the amount flowing into the Government pot, generally due to Congress bills passed, and thus accumulating an unmanageable debt). The Senate version passed two hours after the deadline, and the House of Representatives approved the deal 21 hours later. The government technically went ‘over the cliff’, since the final details weren’t hashed out until after the beginning of the New Year, but the changes incorporated in the deal will be backdated to January 1. The fiscal cliff agreement is good news to some extent but an unnecessary, self-inflicted burden on the economy and financial markets. Basically, it’s a package which reversed tax cuts, agreed on a small increase of tax – stopping the need to impose big income tax increases, and increased investments tax, and minimised the need to exercise large cuts in spending for the pentagon and...
read moreThe Fiscal Cliff – what does it mean for us as Australians?
Some people think that we are shielded by anything happening in the US by our proximity to Asia and in particular by China, our largest trading partner. This is not correct. The world is a very small place and the USA is still a very important country when it comes to global economic policy and in particular Australia. Our top ten trading partners are China followed by Japan, USA, Singapore, United Kingdom, Korea, New Zealand, Thailand, Germany and Malaysia. So as you can see the USA is a very important partner to Australia and to the Australian economy. The fall of the USA over the ‘fiscal cliff’ would essentially create a recession in the USA, and conversely would mean that obtaining finance by corporations and Small and Medium Businesses (SME’s) will become more difficult due to less money being available to loan; the cost of imports from our top trading partners would increase; and the general share market would become shaky. We are already into a new year and with a new year come’s a new optimism. Optimism is the true backbone of the economy and that is what the markets rely on. Never the less we still have to get up in the morning, go to work, pay our bills and get on with it. Most of us believe that after every bust there’s a boom and it’s worth the...
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