Just about every business operator that is even vaguely considering acquiring new assets this year - cars, trucks, equipment - is aware of the Federal Government's Instant Asset Write-Off (IAWO) scheme. It was announced in March as part of the COVID-19 business package as a measure to incentivise investment and stimulate the economy. The deadline was extended to 31 December and pretty much every lender, finance broker (yes, including us) and sellers of trucks, cars and equipment have been mentioning (or should be say pushing) IAWO in their promotional campaigns to attract buyers.
However, while many enterprises understand the scheme, they might not realize its limitations. Specifically, the scheme doesn't cater to all finance and loan products. For an asset to be written-off, it must appear on the company's balance sheet.
Rent to Own and truck leasing are two of the most popular types of loans with truck buyers and these are both off balance sheet finance facilities. That is, the truck appears on the balance sheet of the lending company not the borrowing company. As such, IAWO is not applicable to these loan types. Borrowers due of course receive tax benefits from these loan types in other respects.
Chattel Mortgage truck loan is a product which can be utilised to take advantage of IAWO. As this type of finance may not be as familiar to many of our customers, we’re unpacking the details in this basic explainer.
Chattel Mortgage Structure
With this type of finance, the borrower purchases the truck and the lender takes a mortgage over it as security over the loan. The borrower pays the lender the monthly repayments and any balloon if selected over the loan term. When all the payments have been finalised the lender releases the mortgage. Nice and straightforward.
As the borrower has full use of the truck and ownership in title from the time the loan is set-up, the truck is entered on their balance sheet as an asset/liability. It is depreciated in line with ATO rulings at the end of each financial year.
Comparing this to Leasing and Rent to Own will highlight the difference. With those types of truck finance, the lender actually purchases the truck in title and leases or rents it back to the borrower. The borrower pays the monthly rental/leasing payments. Although the borrower has full use of the truck over the loan term, the lender owns it so it is entered on their balance sheet. So the borrower can’t depreciate or write-off an asset that is not on their books.
Chattel Mortgage Tax Treatment
The tax treatment varies between these different types of finance.
With Chattel Mortgage, the full amount of GST on the truck purchase (excluding the interest portion, which doesn't attract GST) can be claimed on the Business Activity Statement (BAS) return immediately after the purchase. Since all the GST on the purchase price is accounted for, there is no GST charged on the monthly repayments.
On the other hand, with Leasing and Rent to Own, as the lender effectively issues a lease/rental invoice, GST is applied to each monthly repayment, except for the interest portion. The borrower can claim this GST on the appropriate BAS return either monthly or quarterly.
Regarding tax deductibility, the two options also differ. With Leasing and Rent to Own, the monthly payments are considered operating expenses and are fully deductible. However, with a Chattel Mortgage, the monthly payments are not entirely tax deductible; only the interest component is eligible for deduction.
However, Chattel Mortgage borrowers can still benefit from tax deductions concerning their loan. They receive the depreciation allowance on their asset when their end-of-financial-year accounts are prepared.
Choosing the most suitable finance option depends on the business's accounting method. Chattel Mortgage is better suited to businesses using the cash accounting method, while Leasing and Rent to Own are more appropriate for those using the accruals method. Businesses are advised to discuss with their accountants to determine which loan type aligns best with their business setup and financial objectives.
Jade Chattel Mortgage Features
There are many factors in common across all Jade Truck Loans finance types and that starts with our cheap truck finance interest rates. Our better rates apply to all the truck loans we source regardless of the finance type of the truck type.
- Interest rate is fixed over the loan term
- Loan term is negotiated by the Jade consultant and fixed
- Monthly repayments are fixed for the full loan term
- A balloon is an optional inclusion
So that is the basic overview of a Chattel Mortgage. It is an extremely versatile form of finance and widely used by many businesses for a range of purchases including trucks, cars and equipment. It can be used for fully documented or low docs loans and for new and used trucks.
If you have ideas about acquiring your next truck under the IAWO scheme, then we suggest you have a conversation with your accountant around loan types. Then you’ll be ready to brief one of our consultants to source you a Chattel Mortgage quote.
For a Chattel Mortgage quote for your truck purchase, contact Jade Truck Loans on 1300 000 003
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