As we approach the end of the third quarter of the financial year, it's important to keep in mind the approaching deadline of June 30th, which marks the end of the financial year and tax time. Forward-thinking operators are already considering this date and its implications for truck loan tax deductions, as well as strategizing their truck purchases to maximize potential tax benefits.
Understanding that the purchase cost of a truck is a business expense, it's generally expected to be tax deductible. However, the timing, nature, and method of claiming tax deductions for truck purchases can vary based on the specific finance product used for the acquisition.
In the following overview, we'll outline the different variations and key factors that operators should take into account when determining the type of loan that will yield the best tax benefit for their truck purchase. Keep in mind that these are general guidelines, and individual business circumstances may result in variations in tax treatment.
Tax Deductible Truck Loans
There are four main types of loans that are used for the purchase of trucks:-
- Chattel Mortgage for truck & trailer loans which is referred to as Heavy Vehicle Loan or Equipment Loan by some lenders
- Truck Lease Finance
- Commercial Hire Purchase or more commonly, Hire Purchase
- Rent to Buy, Rent to Own and Truck Rental. All of which are finance products which work towards ownership which clearly differentiates these products from hiring or renting a truck for a short period.
All these loan products can be used for all truck categories – light, medium and heavy duty and both new and second-hand vehicles. Each has the option for a balloon, residual or buy back element.
Operators requiring No Docs and Low Docs Truck Finance as well as Bad Credit Truck Loans have their choice of loan type from these main four. Jade Truck Loans offers all these options for our customers. All can be secured at a fixed interest rate, over a fixed loan term of up to 7 years and no deposit finance is possible. All loan offers are based in individual assessments by our lenders.
Loan Type Variations
When it comes to the tax deductibility of different loan products, there are various factors that determine which specific elements of the loan are eligible for deduction. Moreover, the timing within the financial year for claiming these deductions also depends on these factors.
In this concise overview, our focus will be on the two most commonly used forms of finance: Lease and Chattel Mortgage.
- GST: With Chattel Mortgage the full amount of the GST on the truck price can be claimed on the next BAS return. As all the GST has been claimed and paid at the initial purchase time, no GST is charged on the repayments.
With Leasing, the GST is charged on the repayments and any balloon/residual and claimed in line with the relevant BAS return schedule. - Interest charges: Interest on all loan types is a tax deduction. No GST is charged on the interest portion of the repayments or balloon/residual.
- Repayments: The monthly payments for Leasing are treated as a business expense and are fully tax deductible. Repayments on Chattel Mortgages are not fully tax deductible. The interest portion is but the balance is not.
- Depreciation: Depreciating the truck as a business asset is effectively a tax deduction. This is the main tax deduction for Chattel Mortgage Truck Loans. The value of the acquisition is depreciated or written-off as a tax deduction according to the ATO schedule. This schedule sets out what percentage of the value of an asset can be depreciated and claimed as a tax deduction each year over several years.
With Leasing the truck remains under the ownership of the lender and on their balance sheet until the loan is finalised. As the asset is not on the business balance sheet it cannot be depreciated.
Decision Considerations
Making the decision around which particular loan type to select is typically based on a range of factors which are usually discussed with an accountant:-
- Accounting method: There are 2 main accounting methods used by Australian businesses –the accruals method of accounting and the cash accounting method. The accounting method is the method used by the business accountant to prepare the annual accounts and tax return. A method is typically decided on when a business is set up and by considering various objectives of the business.
Chattel Mortgage is seen as suited to the cash method and Leasing to the accruals method. So the accounting method used may determine which loan to select which in turn determines the tax deductible elements of the truck loan. - Balance sheet: Where a business seeks to improve the appearance of their balance sheet or does not choose to have a large asset like a truck on their balance sheet then an off-balance sheet loan such as Leasing may best suit. With Chattel Mortgage the ownership goes directly to the business and the truck entered on their balance sheet. This point refers back to depreciation of assets above.
- Financial objectives of the business will be a key determinant of the type of truck loan.
Temporary Full Expensing
Currently, some businesses can achieve additional tax deductions through temporary full expensing. This allows the business to claim the full purchase price of the truck in the year it was purchased rather than depreciating it over many years.
Businesses and the truck must be eligible under ATO guidelines and the appropriate form of finance – Chattel Mortgage, used for the acquisition.
Timing Truck Purchases
For businesses aiming to capitalize on tax deductions for a new truck acquisition within this financial year, taking action sooner rather than later is advisable. The current interest rate environment for truck loans is favorable, as the Reserve Bank of Australia (RBA) has maintained historically low cash rates for a considerable period. While it's not confirmed, there's a potential for rates to increase later this year.
By securing a truck loan at a low interest rate, businesses can ensure that their purchase remains cost-efficient. Opting for fixed interest rates further guarantees that monthly repayments won't be affected by any potential fluctuations in interest rates. This strategic approach can contribute to maximizing the financial benefits of a truck acquisition while also taking advantage of potential tax deductions.
Contact Jade Truck Loans on 1300 000 003 to discuss your truck loan requirements.
DISCLAIMER: THIS INFORMATION IS ISSUED PURELY FOR THE PURPOSE OF GENERAL INFORMATION PROVISION. IT IS NOT TO BE TAKEN AS THE ONLY SOURCE OF INFORMATION FOR BASING FINANCIAL DECISION-MAKING. THOSE REQUIRING FINANCIAL GUIDANCE AND ADVICE SHOULD CONSULT WITH THEIR FINANCIAL CONSULTANT OR ADVISOR. NO LIABILITY IS ACCEPTED FOR ANY MISREPRESENTATION OF POLICIES, DATA OR ERRORS IN THIS CONTENT.
