Finance choices to buying a car

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In this sponsored post, Canberra chartered accountant GAIL FREEMAN looks at the financing choices when buying a car.

Vo is buying a new car. Her old vehicle was leased but she has been advised to buy the new one using a “chattel mortgage”. She came by, keen for me to explain it to her.

“There are a few different types of finance agreements, the main ones being leasing, chattel mortgages and hire purchase,” I said.

“They are each slightly different, the GST treatment is different and the accounting treatment is different.”

I confirmed that her previous car was leased and had been priced over the luxury car limit.

“A lease is simply a method of renting the car for the term of the lease,” I said. “You enter into a rental contract with the finance company to purchase the car by monthly instalments with a residual value at the end. “The minimum residual percentage is specified by the Australian Taxation Office and it should approximate its selling price when you dispose of the car.

“There is no input tax credit initially unless the first payment is a large upfront payment. Each of the monthly payments has an input tax credit attached as does the residual value paid at the end of the lease.”

“When you lease a vehicle below the luxury car limit, currently $67,525, the lease payments net of GST are the deductions.

“With a vehicle over the luxury car limit, the lease payments may be shown in the financial statements but the tax deductions are the notional depreciation of the vehicle subject to the luxury car limit and the interest charged without any upper limit. Clearly this provides a bigger deduction.

“Ah, that explains why I leased the old car,” said Vo. “The new car is not subject to the luxury-car limit, so that explains the different method.”

I told Vo that the best method of financing a car below the cost limit is by using a chattel mortgage.

“This is a type of loan where the title in the property passes to you when you enter the agreement with the finance company unlike with hire purchase. You pay monthly installments on the loan,” I said.

“There is no minimum residual value so the amount remaining at the end of the agreement can be nil.

“Personally, I prefer to use the percentages that are specified for leases and to make a balloon payment at the end.

“This makes your monthly payments less and should approximate the amount you’ll receive on sale. If you use nil for the value at the end then you will almost certainly have a taxable amount on sale.

“The full input tax credit based on the cost of the car is claimed when you sign the agreement so you don’t pay GST in the monthly instalments.

“Your tax deductions are depreciation up to the cost limit and interest also subject to the cost limit. The accounting is more complex because of this and you will need our help with coding your entries each quarter but otherwise the process is straightforward.”

Vo left my office happy in that she knew what a chattel mortgage was and ready to finalise buying the car.

If you need business help with your financial statements, accounting, your software or tax contact the specialist team at Gail Freeman & Co Pty Ltd. Unit 9, 71 Leichhardt Street, Kingston. Call 6295 2844 or visit 


Disclaimer: This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser.

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