Business Finance Products: The Explainer

Business Finance Products: The Explainer

For businesses making major asset acquisitions there are a number of finance facilities available: Chattel Mortgage, Rent to Own, Comprehensive Hire Purchase (CHP), Novated Car Lease or Salary Sacrificing and Equipment Lease.

Each offers benefits dependent on the accounting method your business uses – cash accounting method or accrual accounting method.

The range of business finance types each include a varying combination of the treatment of GST, which elements of the finance are tax deductible, depreciation and balance sheet entry.

You should discuss the decision with your accountant before requesting a particular finance product from your finance broker.

Chattel Mortgage

  • A very commonly used finance product as it suits many businesses and many purchases.
  • Suits businesses using a cash accounting method.
  • Balloon is optional.
  • Fixed monthly repayments, fixed loan term.
  • Loan terms vary dependent on the goods purchased and individual lenders.
  • The lender takes a mortgage over the asset (chattel) and retains ownership while the borrower makes monthly repayments.
  • When all repayments, including any balloon amount, are finalised, the lender releases the mortgage and transfers ownership to the borrower.
  • During the loan term, the borrower has full use of the asset and is responsible for all ongoing expenses.
  • The borrower can claim GST on the full purchase price on the next BAS so no GST is charged/claimed on the monthly repayments. GST is charged on fees and charges. No GST is charged on interest.
  • Monthly repayments and balloon are not tax deductible. The interest is tax deductible.

Rent to Own

  • An off balance sheet facility, also known as an Operating Lease
  • A rental agreement is established between lender and borrower.
  • Lender retains ownership of the goods and rents them back to the borrower.
  • Borrower has full use of the goods during the rental term.
  • Fixed monthly rental payments which have GST applicable and can be claimed and are tax deductible as an operating expenses.
  • At the conclusion of the rental term, when all monthly payments and any other payments are finalised, the borrower has option to negotiate a buy back price with the lender to take ownership of the goods.

Commercial Hire Purchase (CHP)

  • Suitable for businesses implementing a cash accounting method.
  • CHP agreement is made between lender and borrower with lender holding ownership of the goods while charging the borrower a fixed monthly ‘hire’/repayment.
  • Borrower has full use of the goods during the CHP agreement term (loan term)
  • The monthly repayments are fixed as is the CHP term.
  • Balloon is optional.
  • Loan term is fixed and dependent on lender guidelines.
  • When all payments including balloon are finalised, the lender releases the goods to the borrower’s ownership.
  • GST can be claimed on the full purchase price on the next BAS. No GST applies to monthly payments. GST is not charged on interest. GST is charged on fees and charges.
  • Monthly payments and balloon are not fully tax deductible. Interest portion only is tax deductible.

Novated Car Lease with Salary Sacrifice

  • A specialised finance type for businesses wanting to provide a fully-maintained company vehicle for an employee and the employee chooses to have the costs deducted from their pre-tax salary.
  • An agreement between lender, employer and employee.
  • Employee selects the vehicle and ‘novates’ the financial obligation to the employer.
  • Employer pays monthly lease payments, rego, insurance and other operating expenses.
  • Employer claims the relevant tax deductions and GST and handles any FBT issues in line with the ATO requirements.
  • The costs are deducted from the employee’s pre-tax income. This reduces the employee’s tax obligation.
  • When employer has made all the repayments, ownership of the vehicle is reverted to the employee.

Equipment Lease

  • An off-balance sheet finance product.
  • The asset is listed on the lender’s balance sheet not the borrower’s.
  • Lender essentially purchases the goods, holds ownership, and leases the asset back to the borrower for a fixed monthly payment over a fixed lease term.
  • GST is paid/claimed by borrower on the monthly lease payment. No GST on interest.
  • The lease payments are tax deductible.
  • Residual an option. Based on ATO guidelines.
  • Fixed lease payments and fixed term.
  • At end of lease term when all payments are finalised, ownership is transferred to borrower.

Contact us with your queries.One of our finance brokers can explain each product in more detail.