Which Finance

Which Finance

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

First year tax deductions and GST input tax credits

Written down book value of business motor vehicle at the end of first financial year

Second year tax deductions and GST input tax credits

Written down book value of business motor vehicle at the end of second financial year

Third year tax deductions and GST input tax credits – Ownership retained by paying off residuals for hire purchase and chattel mortgage.

Written down book value of business motor vehicle at the end of the third financial year

Total tax deductions and GST input tax credits summary

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.

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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.