If you’re in business and thinking of taking advantage of the instant asset tax write-off of up to $150,000 locked in until December of 2020, most small to medium businesses will want to use car finance. One type of car finance, known as a chattel mortgage, can help you in many ways when it comes to cash flow, tax, and depreciation.
What is a chattel mortgage?
A chattel mortgage is a type of loan agreement in which a bank or lender gives a business a loan to purchase a vehicle, known as “chattel” which is related to the word “capital” and “cattle” – property. Lenders will only approve chattel mortgages to ABN holders who intend to use the car for business purposes over 50% of the time. You can’t finance a personal car through your business for personal use; you’ll need to take out a consumer car loan.
The business takes ownership and possession of the vehicle, which means it’s listed as an asset on the company books. A mortgage is placed on the vehicle, which makes it a security or collateral against the loan. Once the loan is paid off, the mortgage is removed – much like a home mortgage.
Since the car is used as collateral, this means it’s a lower risk for the lender. That means more competitive interest rates in comparison with unsecured car loans.
Why are chattel mortgages best for business?
Chattel mortgages are suited for business because businesses can claim tax benefits when you buy and as you pay off the loan.
Firstly, as the purchase is a cash sale, you can claim the GST on the purchase price. You can also claim the fuel input tax credit. Over the life of the loan, you can deduct the interest paid on your repayments; or your lender can claim it on your behalf. You can also claim the tax breaks on depreciation up to the depreciation limit.
Of course, you can also claim the instant asset write-off of up to $150,000 for businesses with less than $500 million turnover.
Chattel mortgages are business loans and lenders may finance 100% or more of the vehicle’s value. You may want to pay off insurance and registration in instalments too; this is all part of how a chattel mortgage works for business.
Bill Tsouvalas, business finance expert and CEO of Savvy says chattel mortgages are a great solution for business: “Taking out a chattel mortgage to get your business on the road is essentially a cash-flow neutral option. Your car could start returning on your investment even before the first repayment is due, which is exactly how an asset should perform in practice.”
Other options with a chattel mortgage
Much like some consumer car loans, you can choose to offset some of your regular repayments by setting aside some of the loan as a balloon or residual value payment. These can range anywhere between 20-50% of the loan total. The downside is you’ll need to pay out the “balloon” to remove the mortgage at the end of the loan term.
Remember to consult a financial adviser to figure out if a chattel mortgage is the right option for your business.