What finance option is right for me?
Trying to figure out which finance product is right for you can be confusing. In fact, we recommend discussing your situation with your tax professional. However, to simplify your decision process we outline the choices available to you here.
Lease products fall into two categories as either:
- Finance lease
- Operating lease
They differ in the way they treat ownership, disposal and residual risk on the vehicle. Hire purchase options are available and function in a similar fashion to a loan taken to purchase an asset.
In order to decide on the most appropriate type of finance you first need to consider the following:
- Do you wish to own the asset at the end of the lease period?
- Do you use the asset for business purposes more than 50% of the time?
- Are you looking to finance the vehicle only, or do you also want a range of fleet management services?
- How long do you intend to keep the vehicle and how many kilometres will you travel?
- Do you want or need to show the asset on the company balance sheet?
A finance lease is a form of rental agreement under which you lease an asset for an agreed period and rental. A residual value is set upfront to reflect the asset’s value at the end of the term. This is accounted for on the balance sheet.
Under the conditions of most finance leases, you have no option or right to purchase the asset. However it is common practice that most financiers will consider an offer from you to purchase the asset at the end of the term for the residual value. Alternately, you may trade it in on a replacement, return it to the financier paying the difference between the residual and market value (residual risk) or even extend the lease for a further term.
A fully maintained operating lease offers an organisation the benefits of a hassle-free method of vehicle usage. It is finance not shown on the balance sheet and in one monthly payment takes care of all costs associated with the vehicle i.e. all costs in relation to maintenance, insurance, finance are included. Once you decide on the motor vehicle required, you simply decide on the length of the lease required and calculate how many kilometers you will travel in each year. Based on this the financier will calculate a monthly repayment. At the end of the lease term you hand the vehicle back to the lender with no residuals or balloon payments required.
Commercial hire purchase (CHP) is an agreement between the purchaser and the financier whereby the financier owns the vehicle or equipment during the hiring period. It differs from a finance lease in that the goods automatically become yours once all terms of the agreement have been completed – usually when the final installment is paid. As such it is finance taken out by a business when they wish to purchase the goods.
A CHP can be arranged with or without a final balloon payment at the end of the term depending on what your budgetary requirements are. The repayments are fixed for the term of the CHP. An upfront deposit or trade-in, which will reduce your rental commitments, is optional. It is accounted for on the balance sheet.
A similar arrangement to a hire purchase but with specific GST benefits, which in certain circumstances will allow the entire GST proportion, to be claimed in the first BAS period after purchase. The loan structure can be tailored in a similar fashion to a CHP or finance lease
Novated lease (salary packaging)
It is an agreement between an employee, the employer and the financier. The lease is taken out in the name of the employee and the employer agrees to take on the repayment responsibilities for the duration of the employee’s employment. It is not recorded on the balance sheet of the employer.
If the employee leaves this employer, the lease may be transferable to a new employer or the employee can take on the responsibility of the repayments. The original employer no longer has any financial responsibility and is not left with a vehicle they do not require.
The benefit to the employee may be the reduction of tax as a result of having the repayments made out of pre-tax dollars. There may be fringe benefits tax consequences (based on the vehicle value and kilometres travelled) as a result of the transaction between the employee and the employer, so advice from your tax professional is recommended. Similar to a finance lease, residual risk rests with the employee.
With an abundance of information available to you, it can sometimes be overwhelming. That's why Mortgage Providers is here to help, give one of our friendly brokers a call and we will explain all the options you have available and answer any questions you may have. Reach us on 1300 656 600 or visit our contact us page and we will call you!