Business equipment finance comparison of lease, hire purchase and chattel mortgage
You are looking to finance a business vehicle and you are not sure which finance structure to choose?
This
following illustration of the finance structure comparison of lease,
hire purchase and chattel mortgage show how they differ on cash outflows
and treatment of tax deductions.
We will use following assumptions: -
The business uses cash accounting method.
Cost of motor vehicle is $55,000(Inclusive of GST). Brokerage, bank
set-up cost and other charges are ignored on this example to simplify
the calculation.
Residual amount is set at $25,000.
The motor vehicle is business use.
Term of finance is 36 month.
Same repayments amount are used for simpler illustration. In real
commercial terms repayments amounts vary between financial products.
Use interest rate of 9.5% - result in $1,150 repayment per month.
25% diminishing method used to calculate depreciation rate.
In this illustration the motor vehicle is returned at the end of
lease. The motor vehicle is retained in hire purchase and chattel
mortgage by paying out residual at the end of the contracts.
Total costs – total cash outflow for the full term of the loans
Lease
Hire Purchase
Chattel Mortgage
Monthly payments
$1,150
$1,150
$1,150
X 36 months =
$41,400
$41,400
$41,400
Add Residual
N/A
$25,000
$25,000
Total costs
$41,400
$66,400
$66,400
First year tax deductions and GST input tax credits
Lease
Hire Purchase
Chattel Mortgage
GST credit
$1,255
$909
$5,000
Tax deductions
Lease expense
$12,545
N/A
N/A
Interest expense
N/A
$4,374
$4,374
Depreciation expense
N/A
$12,500
$12,500
Total expenses
$12,545
$16,874
$16,874
Written down book value of business motor vehicle at the end of first financial year
Lease
Hire Purchase
Chattel Mortgage
Asset - motor vehicle
N/A
$37,500
$37,500
Liability –Borrowing
N/A
$45,574
$45,574
Second year tax deductions and GST input tax credits
Lease
Hire Purchase
Chattel Mortgage
GST credit
$1,255
$909
N/A
Tax deductions
Lease expense
$12,545
N/A
N/A
Interest expense
N/A
$3,907
$3,907
Depreciation expense
N/A
$9,375
$9,375
Total expenses
$12,545
$13,282
$13,282
Written down book value of business motor vehicle at the end of second financial year
Lease
Hire Purchase
Chattel Mortgage
Asset - motor vehicle
N/A
$28,125
$28,125
Liability –Borrowing
N/A
$35,681
$35,681
Third year tax deductions and GST input tax credits – Ownership retained
by paying off residuals for hire purchase and chattel mortgage.
Lease
Hire Purchase
Chattel Mortgage
GST credit
$1,255
$3,182
N/A
Tax deductions
Lease expense
$12,545
N/A
N/A
Interest expense
N/A
$3,119
$3,119
Depreciation expense
N/A
$7,031
$7,031
Total expenses
$12,545
$10,150
$10,150
Written down book value of business motor vehicle at the end of the third financial year
Lease
Hire Purchase
Chattel Mortgage
Asset - motor vehicle
N/A
$21,094
$21,094
Liability –Borrowing
N/A
Paid Off
Paid Off
Total tax deductions and GST input tax credits summary
Lease
Hire Purchase
Chattel Mortgage
GST credit
$3,765
$5,000
$5,000
Tax deductions
Lease expense
$37,635
N/A
N/A
Interest expense
N/A
$11,400
$11,400
3 year dep’n expense
N/A
$28,906
$28,906
Total expenses
$37,635
$40,306
$40,306
The hire purchase and the chattel mortgage finance give more tax
deductions than the lease finance in first two years. In third year the
lease finance tax deduction is greater as the interest and depreciation
components of the hire purchase and the chattel mortgage decreased.
The
chattel mortgage has advantage over the hire purchase in first year as
you can claim full amount of GST credit. But at the end of third year
the hire purchase catches up with the chattel mortgage. Only difference
between the hire purchase and the chattel mortgage is the timing
difference in claiming GST credit.
Disclaimer
Every effort has been made to offer the most current, correct and clearly expressed information possible within this site. Nonetheless, inadvertent errors can occur and applicable laws, rules and regulations may change.
These materials on this website are general in nature. It is made available on the understanding that the JH Business Services & Taxation is not thereby engaged in rendering professional advice. Before relying on the material in any important matter, users should carefully evaluate its accuracy, currency, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
JH Business Services & Taxation Accounting | Business Advisory | Tax Services Specialist in small to medium business & personal tax services
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