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.
While many businesses are aware of the scheme they may not be as aware that it does not apply to all types of finance and loan products. As an asset write-off measure, the asset, in this case the truck, must appear on the company’s balance sheet in order to be depreciated/written-off.
Rent to Own and 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 is a loan 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 also differs between these types of finance.
With Chattel Mortgage the full amount of GST on the truck purchase, not the full loan amount as the interest portion doesn’t attract GST, can be claimed on the BAS return immediately following the purchase. As all the GST on the purchase price has been accounted for, there is no GST charged on the monthly repayments.
With Leasing and Rent to Own, as the lender is essentially issuing a lease/rental invoice, GST is applied to each monthly repayment excluding the interest portion. So the borrower claims that on the appropriate BAS return either each month or each quarter.
The tax deductibility also differs. With Leasing and Rent to Own, the monthly payments are considered as an operating expense so they are fully deductible. But with a Chattel Mortgage, the monthly payments are not fully tax deductible, only the interest component is.
But, Chattel Mortgage borrowers don’t miss out on tax deductions in regard to their loan. They receive the depreciation allowance on their asset when their end of financial year accounts are prepared.
Chattel Mortgage is suited to businesses that use the cash accounting method while leasing and Rent to Own to businesses using the accruals method. So businesses are always advised to discuss with their accountant which loan type will best suit their business set-up and meet their requirements in regard to 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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