Glossary
Commercial Hire
Purchase
Chattel Mortgage
Finance
Lease
Novated Lease
Rental
Structured
Finance
Commercial Hire Purchase
A Commercial Hire Purchase Agreement can be used to finance any depreciating asset and is an alternative to the traditional business loan. The equipment is hired from the financier until the last payment is made. Once the final payment is made, ownership of the goods passes directly to the hirer. This is a cost effective way to purchase revenue producing assets without tying up working capital.
The finance can be structured so as to fully amortise the debt over the term of the contract or a balloon payment can be incorporated in to the agreement to reduce the monthly repayments. On expiration of the contract the balloon can either be paid in full or rolled over for a further term. GST is financed up front and both depreciation and interest charges are generally deductible for taxation purposes*.
No GST is payable on the monthly repayment, however stamp duty at the applicable rate is.
*Independent financial advice should be sought from your financial adviser to assess whether this type of arrangement is suitable for your individual circumstances.
Chattel Mortgage
This type of financing arrangement is similar to a Commercial Hire Purchase except that the hirer owns the goods from the outset. The financier takes a charge over the goods by way of security and releases this charge once the final payment has been made.
The GST can be financed up front and the agreement is treated as a loan for taxation purposes, hence GST does not apply to the monthly repayments or any balloon payment (if applicable).
Stamp duty is calculated on the total amount financed and is payable up front. The finance can be structured so as to fully amortise the debt over the term of the contract or a balloon payment can be incorporated in to the agreement to reduce the monthly repayments. If you hold an ABN, the total amount of the GST may be claimable up front, which can assist with cashflow.
Both depreciation and interest charges are generally deductible for taxation purposes*.
*Independent financial advice should be sought from your financial adviser to assess whether this type of arrangement is suitable for your individual circumstances.
Finance Lease
A Finance Lease can be used to purchase any worthwhile asset but differs from a Commercial Hire Purchase and Chattel Mortgage in the ownership of the goods and the treatment of the GST. The asset to be acquired is owned by the financier (the lessor) and the borrower (lessee) makes regular repayments for a specified period.
A requirement for a Finance Lease is that an applicable Residual Value is placed on the asset, as set by the Australian Taxation Office, and should reflect the market value of the goods at the expiration of the term.
GST is not payable on the initial purchase, however there is GST payable on both the monthly rentals and the Residual Value. ABN holders may be able to claim the GST component as an Input Tax Credit either each month or quarter.
In general the monthly rental is deductible for taxation purposes*. At the end of the term, there are a number of options available, which include renegotiating the lease for a further period of time or handing the goods back to the lessor.
*Independent financial advice should be sought from your financial adviser to assess whether this type of arrangement is suitable for your individual circumstances.
Novated Lease
This product is available to salaried employees who qualify for salary sacrifice via their employers. The agreement is basically a Finance Lease with a separate agreement signed between the employee, the employer and the lessor whereby the employer agrees to make the monthly repayments on behalf of the employee from their pre-tax salary.
The individual is assessed in his or her own right, with the only obligation to the employer being to make the monthly repayment.
This can have taxation benefits for an individual*, and the GST component of the monthly rental is paid by the employer. One of the benefits of these types of arrangements to both an employer and an employee is that the asset remains with the borrower, even if they change employment.
*Independent financial advice should be sought from your financial adviser to assess whether this type of arrangement is suitable for your individual circumstances.
Rental
A Rental Agreement can be used to purchase any worthwhile asset and is an agreement between the renter and the financier to rent the equipment at a set amount per month over a set period of time.
As the goods are owned by the financier, the asset and liability does not appear on the balance sheet and in general the monthly rentals are deductible for taxation purposes*.
At the expiration of the term the renter can renegotiate the agreement for a further period of time, hand the goods back, update the equipment by entering in to a new rental agreement or offer to purchase the goods at the prevailing market price at the time.
*Independent financial advice should be sought from your financial adviser to assess whether this type of arrangement is suitable for your individual circumstances.
Structured Finance
Commercial Hire Purchase, Finance Lease and Rental agreements can be structured to assist with cash flow or seasonality in a business, subject to normal credit criteria.
As an example, primary producers can finance agricultural equipment with quarterly, half yearly or annual payments to coincide with growing cycles.
Another example is existing business’ that have an opportunity
to grow through a new contract or venture that requires additional equipment
immediately, but may not see the benefit of increased cash flow for the first
three to six months. In this case, repayments can be stepped to begin lower and
increase over a period of time to coincide with increased cash flow.