Chattel Mortgage verses Novated Leasing: Pros & Cons
When a vehicle is primarily used for business, there are various methods to claim its running expenses, but not all options offer the same benefits. It's essential to understand the differences to maximize your financial return and ensure compliance with tax regulations.
Chattel Mortgage
A Chattel mortgage is a commercial loan typically used for financing vehicle, of all shapes and sizes. The borrow can be a business or an individual who uses the vehicle mainly for business purposes (+50%), the asset is owned by the borrower but the financier holds a financial interest until the debt is repaid. As the borrower is seen as the owner they are also able to claim any available gst in the purchaser if they are registered for gst.
Pros
Chattel mortgages can be more flexible on commencement with borrows able to choose terms and residual values at the end to their preference.
Cons
Tax benefits related to running a vehicle are typically handled by an accountant at the end of the financial year, which can be less favorable from a cash flow perspective. GST savings are available only to companies or individuals registered for GST. Depreciation on the vehicle, a primary tax deduction managed by your accountant, decreases annually, which could reduce your tax return over time and potentially make the vehicle seem more costly. Additionally, borrowers might face a tax liability if they sell the vehicle for more than its depreciated value, resulting in a capital gain.
Novated Lease
A novated lease is only available to employees of a company who offer the benefit. As the name suggests the vehicle is seen for tax purposes as a rental taken out in the employees name with the obligation of the lease transferred to the employer on commencement. The employer makes the vehicle available to the employee and recovers the funds from the employees salary, benefiting from income tax and gst savings along the way.
Pros
Tax deductions through payroll work differently from those handled by an accountant. With payroll deductions, tax savings are realized immediately, eliminating the need to claim additional tax at the end of the year since the tax was not paid initially. GST savings on lease payments and running costs are achieved by the employer and then passed on to the employee. Lease payments are tax-deductible, providing a consistent deduction throughout the lease term, unlike depreciation, which can vary. Additionally, running costs are included in the lease package and spread evenly over the term, resulting in fixed costs. There are no tax implications at the end of the lease if the vehicle is sold.
Cons
Novated leases are highly structured agreements. They typically range from 1 to 5 years in duration, with fixed residual values set for the end of the lease term. Unlike other financing options, novated leases do not require deposits or trade-ins, as the employee cannot contribute to the initial vehicle purchase. In the infancy of the lease pay-outs can be more expensive than a standard vehicle loan
Summary
If you are an employee a novated lease might be a valuable option for you to consider, with large tax savings available and consistent payments throughout. Its always worth looking into the numbers deeper with the help of an accountant also.