GST Finance Strategy

What is the right strategy?

The GST Finance Strategy adopted on purchase of commercial equipment will ensure profitability is maintained but not at the expense of cash flow. The most important consideration when purchasing commercial equipment is to be conversant with the different type of finance products provided by banks/finance companies and the impact these will have not only on the bottom line of the business but the GST implications and their impacts on Cash Flow which will often be the deciding factor for Small Business.

Lease

Under a finance lease, operating lease or rental program, the finance company pays the full amount to the supplier including the GST, which they receive back from the ATO. You in return agree to pay monthly repayments which include GST which is reclaimed by the business when you lodge your Business Activity Statement. See How to record a Finance Lease Transaction in MYOB.

Pros

• Cash Flow: Does not require upfront payments/deposits. Regular Monthly payments can make things easier to manage.
• Obsolescence: If the machine is technologically outdated/redundant, stop paying for it and give it back to the finance company. Make sure the lease contract provides for upgrades as they become available.
• Easier Financing: This type of finance is heavily dependant on the type/class of asset that the bank is buying, but that will also mean it is easier type of loan to get because the bank is surer it will get it’s money back.

Cons

• Overall Cost: More expensive than most other loan types.
• Terminantion Fees: Make sure you look at the small print, if you no longer need the equipment termination fees may apply.
• Complicated Terms: Make sure you understand the lease terms, who is finance the lease, what happens at the end of the lease, repairs etc.

Chattel Mortgage

Chattel Mortgage is essentially a Mortgage over goods to be financed. Chattel Mortgage is classed as a cash sale in that the goods automatically become yours on purchase and the finance company takes a mortgage over the chattels. However for tax purposes you can claim depreciation, running costs and interest paid, against your business income. The Chattel Mortgage allows businesses to claim the full input tax credit from GST incurred expenses immediately (next BAS statement).
Always seek advice from your accountant in regard to this.

Pros

• Interest charged and depreciation of the vehicle are tax deductible
• Terms can be flexible and pre-calculated fixed repayments make for easy future budgeting
• After full payment of the chattel mortgage agreement, ownership of the goods is transferred to you.

What are the tax implications of a chattel mortgage?

The monthly repayment or balloon amount is not subject to GST.
Where the vehicle is used for business use, the hirer can claim “interest and depreciation”. That is interest on the lease payments and depreciation up to the luxury car tax threshold or depreciation limit of $57,180
GST is also claimable on the purchase price of the vehicle in one lump amount.

What is a Commercial Hire Purchase?

A commercial hire purchase is a type of lease where the customer can obtain goods by hiring them over the repayment term. The transfer of title to the customer for the asset is completed when the finance provider receive’s the last rental.
A commercial hire purchase is also known as a hire purchase, CHP, offer to hire or term purchase.

What are the tax implications of a commercial hire purchase?

Companies or sole traders using the accrual method for accounting can claim the GST as a lump sum on their next (BAS), whereas companies or sole traders using cash method for accounting can claim the GST in evenly over the term of the agreement.

The monthly repayment or balloon amount is not subject to GST.

Where the vehicle is used for business use, the hirer can claim “interest and depreciation”. That is interest on the lease payments and depreciation up to the luxury car tax threshold or depreciation limit of $57,123

GST is also claimable on the purchase price of the vehicle.

Balloons and terms

The chattel mortgage balloon is the amount that will need to be paid to the finance provider at the end of a chattel mortgage. Having a balloon put into your agreement makes the monthly lease payments cheaper and much more affordable. The decision of having a balloon or not is entirely up to you, you may choose to pay the motor vehicle down to zero which means once the final lease payment is made, you own the motor vehicle.