When acquiring assets for your business you have the choice of a number of loan products to finance the purchase. We offer the full range of commercial finance facilities through our lenders which include both banks and non-bank lenders.
But it is up to the business to advise their finance broker or lender which particular loan product they are seeking. That decision is best made in consultation with your accountant as the choice of finance depends on the accounting method you use and your financial goals. Specifically, how your business treats the different aspects of taxation.
The main types of finance products for business include:
The most commonly used are leasing and Chattel Mortgage. All finance types can be used for the purchase of a wide range of commercial assets including cars, heavy vehicle finance, all types of truck finance, plant and machinery and an extensive selection of
equipment financing across all industry sectors.
The treatment of tax is determined by the type of loan not the type of asset being purchased.
Tax Variations
Commercial finance facilities feature differing treatments of taxation in respect to tax deductions, asset depreciation and GST.
Read more.
GST: Application and Claiming
There are a number of varying aspects in regard to the treatment of GST with finance products.
- Which elements of the loan attract GST.
- Which party to the finance deal – lender or borrower – pays and claims the GST and at what time.
Across the full range of finance facilities, interest on loans does not attract GST.
Leasing and Rent to Own and GST
With these loan products, the lender is acquiring the asset and leasing/renting it back to the borrower. Therefore the lender is responsible for paying the GST applicable to the initial purchase price and claiming this on the relevant BAS return.
The lender is then effectively issuing the borrower with an invoice for monthly payments. Therefore the lender applies GST to these payments. The borrower pays the GST when making their rental/lease payment and can claim it on the relevant BAS return.
GST would also be applied to any residual or buyback monies paid when the loan is finalised.
CHP and Chattel Mortgage and GST
When using these finance facilities, the borrower is actually purchasing the asset and the lender using the asset as security over the loan. In these instances, the borrower pays the GST on the price at the time of purchase. This of course is actually rolled into the loan amount. The borrower can then claim that GST paid on the next BAS return after the purchase is finalised.
Find out more here.
As the full amount of GST on that asset has been paid and claimed at the time of purchase, there is no GST applied to the monthly repayments.
Tax Deductibility
The interest portion of all loans is fully deductible for all types of finance – Chattel Mortgage, CHP, Leasing and Rent to Own. However, the remaining portion of the monthly repayment that is repaying the capital, is not fully deductible for all types of loans.
- Leasing and Rent to Own: the leasing or rental payments are considered as an operating expense under these finance facilities and as such are a legitimate tax deduction in most cases.
- CHP and Chattel Mortgage: only the interest is tax deductible with these types of loans. The balloon and the repayments are not fully deductible.
Depreciation Benefits
Asset depreciation is another form of tax deduction. It is applied to individual assets according to ATO rulings at the end of the financial year when the company’s annual accounts and tax return is prepared.
The usual process is for an asset to be ‘depreciated’ as a percentage of the purchase price or value each year. The amount of this depreciation is then applied as a tax deduction for the business. Over time, the full value of the asset may be depreciated. If an asset is sold it is no longer subject to depreciation by that business.
In order for an asset to be subject to depreciation, it must appear on the company’s balance sheet. With leasing and rent to own, the asset does not appear on the borrower’s balance sheet. So these types of finance are not subject to depreciation.
The asset is entered on the balance sheet of the borrowing company when purchased with Chattel Mortgage or CHP. Under this type of finance, the asset can be depreciated according to ATO rulings. The depreciated value is then treated as a tax deduction.
Overall Outcomes
The treatment of the different elements of a loan varies according to loan type. However, the borrower may realise a benefit in regard to both GST and tax deductibility with all types of finance. But when that benefit is realised differs. The
business finance type selected is very much determined by the accounting method implemented by the business.
Sourcing a loan requires consideration of a number of issues including the taxation implications or more specifically the tax benefits. Having a discussion around these issues with your accountant is highly recommended.
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DISCLAIMER: THE OBJECTIVE OF PROVIDING THE INFORMATION IN THIS ARTICLE IS NOT TO PROVIDE FINANCIAL ADVICE BUT TO PRESENT GENERAL INFORMATION AND DETAILS ON GOVERNMENT POLICIES, FINANCE PRODUCTS, GOODS AND SERVICES AND OTHER TOPICS. NO LIABILITY IS ACCEPTED IN REGARD TO ERRORS IN THE PROVISION OR INTERPRETATION OF SAID INFORMATION. INDIVIDUALS SHOULD CONSULT WITH FINANCIAL ADVISORS IN REGARD TO SPECIFIC DECISIONS AROUND THEIR FINANCE.
