Choosing finance for a truck, vehicle or piece of machinery involves more than finding a repayment that fits the budget. The finance structure, business entity, GST position, percentage of business use and expected life of the asset can all affect how the purchase is treated for tax purposes.

For Australian businesses looking for a tax-efficient financial structure, the finance decision and the tax decision should be considered together. TAFS can help structure the asset finance, while your accountant can confirm which deductions and tax treatment apply to your business.

The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for trucks, commercial vehicles, machinery and other income-producing business assets through access to more than 80 bank and non-bank lenders.

Before financing your next business asset, these are nine tax questions worth discussing with your accountant.

1. Who Should Own the Asset?

Before financing a vehicle or piece of equipment, confirm which business entity should purchase and own it.

The answer can depend on whether the business operates as a:

• Sole trader
• Company
• Partnership
• Trust
• Other business structure

Different business structures have different tax and reporting obligations, so the entity taking out the finance should be considered before settlement rather than after the purchase has already been completed.

For example, the entity generating the income from the equipment may not always be the same entity a business owner initially assumes should purchase it.

Questions to discuss with your accountant include:

• Which entity will use the asset?
• Which entity will generate the income from it?
• Which entity should make the finance repayments?
• Who should claim the depreciation and other eligible deductions?
• Will private use be involved?

TAFS can arrange the asset finance once the purchasing entity has been confirmed.

2. How Much of the Asset Will Be Used for Business?

Tax deduction strategies depend heavily on how the asset is actually used.

Australian businesses can generally claim eligible expenses that are directly related to earning business income. Where an expense has both business and private use, the deduction generally needs to be limited to the business-use portion. Records also need to support the claim.

This can be particularly relevant for:

• Utes
• Vans
• Light commercial vehicles
• Cars used by business owners
• Equipment kept at home
• Assets that have both personal and commercial use

A truck or excavator used entirely for commercial work may have a clearer business purpose than a vehicle used by its owner on weekends.

Before financing, ask your accountant how business use should be recorded and whether any private use will affect the available deductions.

3. How Will the Asset Be Depreciated?

Buying a business asset doesn't always mean the full purchase price becomes an immediate deduction.

Machinery, vehicles and equipment are generally capital assets. The timing of the deduction can depend on the depreciation rules applying to the business and asset. Eligible businesses may also have access to simplified depreciation or an immediate deduction in some circumstances.

Your accountant can determine:

• Whether the asset is depreciated over time
• Which depreciation rules apply
• When depreciation starts
• Whether the business is eligible for simplified depreciation
• Whether any current immediate deduction applies
• How future disposal of the asset will be treated

This is particularly important when purchasing higher-value equipment such as:

• Prime movers
• Excavators
• Tractors
• Harvesters
• Manufacturing machinery
• Commercial vehicles

For most businesses, the tax treatment of a major asset should be understood before deciding how much to finance.

4. Can the Business Claim GST on the Purchase?

If your business is registered for GST, ask your accountant how the GST on the proposed asset purchase will be treated.

The answer can depend on:

• Whether GST is included in the purchase price
• Whether the seller is registered for GST
• The percentage of business use
• The business's GST accounting method
• The type of vehicle or equipment
• Whether the purchase is through a dealer or private seller

This becomes important when comparing two similar assets.

A dealer transaction and a private sale may have different GST outcomes even if the advertised purchase prices appear similar.

Understanding the GST position before settlement can also help with business capital planning because the timing and amount of any eligible GST credit can affect cash flow.

Speak with your accountant before including an expected GST benefit in your purchase calculations.

5. Which Part of the Finance Repayment May Be Deductible?

A common mistake is treating the entire asset finance repayment as a deductible expense.

Under a chattel mortgage, each repayment generally reduces the amount borrowed and includes financing costs. The asset itself is dealt with separately under the applicable capital allowance or depreciation rules.

Business deductions depend on the nature of the expense and whether it relates directly to earning assessable business income. Capital expenses and operating expenses can also be claimed at different times.

Your accountant can explain how the repayment schedule should be treated and identify the eligible finance costs.

Ask for a copy of the finance schedule and keep it with the business's tax records.

6. Does the Balloon Payment Change the Tax Outcome?

A balloon payment can be useful when financially structuring a vehicle or machinery purchase, but it should not be selected simply because of an assumed tax benefit.

A balloon leaves part of the finance amount until the end of the term.

This can:

• Reduce regular repayments
• Preserve more working capital
• Leave a larger final payment
• Affect the total finance cost
• Change the business's future trade-in or refinance position

The balloon changes how the finance is repaid. Your accountant should separately consider how the asset and eligible finance costs are treated for tax purposes.

Before choosing a balloon, consider:

• Expected value of the asset at the end of the term
• How long the business intends to keep it
• Future replacement plans
• Expected annual use
• Maintenance costs
• Likely trade-in value
• Whether the business can pay the balloon when it falls due

TAFS can help structure the term and balloon around the business's cash flow. Your accountant can advise on the tax implications.

7. Are the Running Costs Deductible?

The asset purchase is only one part of the cost of owning business equipment.

Depending on the asset, deductible expenses may include eligible business costs associated with operating and maintaining it. The ATO allows deductions for many expenses incurred in carrying on a business where they are directly related to earning assessable income, subject to the relevant rules and any private-use adjustment.

For a truck or commercial vehicle, ongoing expenses can include:

• Fuel
• Insurance
• Registration
• Servicing
• Repairs
• Tyres
• Tolls
• Other operating expenses

For machinery, these may include:

• Fuel
• Repairs
• Servicing
• Insurance
• Replacement parts
• Consumables
• Other operating expenses

Knowing the expected running costs also helps when deciding whether the proposed finance repayment is realistic.

The business needs to afford both the asset finance and the cost of keeping the equipment operating.

8. Does the Purchase Timing Matter for Tax Planning?

The date an asset is ordered isn't always the only date that matters for tax planning.

Depending on the deduction being claimed, factors such as when the asset is acquired, first used or ready for business use can affect when a deduction is available. Capital assets may also be treated differently from normal operating expenses.

This is worth discussing with your accountant when purchasing equipment close to the end of a financial year.

For example, consider:

• When will the equipment be delivered?
• When will finance settle?
• When will registration be completed?
• When will the business actually begin using it?
• Will installation be required?
• Is the equipment immediately ready for commercial use?

A business shouldn't purchase unnecessary equipment simply to chase a tax deduction.

The asset should first make commercial sense for the business.

9. Does the Finance Structure Suit the Business After Tax Is Considered?

A tax-efficient financial structure should still work commercially.

The strongest finance structure isn't necessarily the one that appears to create the largest immediate deduction.

It should also consider:

• Monthly cash flow
• Total finance cost
• Asset working life
• Deposit
• Balloon payment
• Available business capital
• Maintenance costs
• Expected income
• Replacement cycle
• Future trade-in value

A large deposit can reduce the amount borrowed, but it also uses cash that could remain available for working capital.

A larger balloon can reduce monthly repayments, but it leaves more to repay later.

A longer term can reduce the regular repayment, but it may increase the total finance cost.

The tax treatment is one part of the overall decision.

TAFS can structure the finance around the asset and business cash flow, while an accountant can advise on tax planning and the treatment of the purchase. Australian Government guidance also recommends using appropriately qualified financial professionals for decisions involving business purchases and tax.

What Is a Chattel Mortgage?

The main finance structure TAFS arranges for business vehicles and equipment is a chattel mortgage.

Under a chattel mortgage:

• The business owns the asset from settlement
• The lender registers a security interest over it
• The finance is repaid over an agreed term
• A deposit may be included
• A trade-in can contribute to the purchase
• A balloon payment may be available
• The lender's security is removed once the finance is repaid

Chattel mortgage finance can be used for eligible:

• Trucks
• Trailers
• Utes
• Vans
• Excavators
• Skid steers
• Agricultural machinery
• Manufacturing equipment
• Trade equipment
• Other commercial assets

The appropriate tax treatment depends on the business and asset, so TAFS recommends confirming the tax position with your accountant.

Should You Use Cash or Finance a Business Asset?

Paying cash can remove the need for finance repayments, but it also reduces the amount of business capital available after the purchase.

Financing can allow the business to keep more cash available for:

• Payroll
• Suppliers
• Fuel
• Maintenance
• Insurance
• Tax obligations
• Marketing
• Unexpected repairs
• Working capital

The decision shouldn't be based on tax treatment alone.

A business may prefer to finance an asset even when it has enough cash to purchase it outright because maintaining liquidity is important to its day-to-day operation.

Alternatively, using a deposit may reduce the amount financed and the total interest cost.

Your accountant can help assess the tax position, while TAFS can compare the available finance structures.

Should Tax Benefits Determine Which Asset You Buy?

Tax benefits should support a sound business purchase rather than create the reason for making one.

Before financing an asset, consider:

• Is there enough work for it?
• Will it generate additional income?
• Will it reduce equipment hire?
• Will it replace subcontracting costs?
• Will it reduce downtime?
• Is it replacing unreliable equipment?
• What are the expected running costs?
• How long will the business keep it?
• Will the repayments remain manageable in quieter periods?

A deduction reduces taxable income. It doesn't make the asset free.

The purchase should make financial sense before any expected tax benefit is taken into account.

What Records Should You Keep?

Good recordkeeping is an important part of claiming business deductions. The ATO requires businesses to keep records that support deductible expenses and distinguish business use from private use where relevant.

For a financed business asset, keep records such as:

• Purchase invoice
• Finance agreement
• Repayment schedule
• Deposit receipt
• Trade-in documents
• Registration documents
• Insurance records
• Maintenance invoices
• Repair receipts
• Fuel records
• Business-use records
• Sale or trade-in documents
• Finance payout information

Having the records organised from settlement can make future tax reporting much easier.

How TAFS Helps Structure Business Asset Finance

TAFS focuses on the finance side of the transaction.

1. Understand the Purchase

We review the asset, purchase price and how it will be used by the business.

2. Assess the Application

TAFS reviews the business history, available documentation and proposed finance amount.

3. Complete a Soft Credit Check

The initial credit check leaves no mark on the applicant's credit file.

4. Internal Credit Review

Our internal credit team reviews the application before a formal lender submission.

5. Compare Suitable Lenders

TAFS has access to more than 80 bank and non-bank lenders.

6. Structure the Finance

The finance amount, term, deposit and balloon can be structured around the asset and business cash flow.

7. Submit and Settle

Once an option has been selected, TAFS manages the formal application and coordinates settlement.

TAFS provides asset finance support rather than tax advice. Your accountant should confirm how the purchase, GST, depreciation and eligible deductions apply to your business.

Frequently Asked Questions

What Is a Tax-Efficient Financial Structure for Business Equipment?

There isn't one finance structure that produces the best tax result for every business.

The appropriate structure depends on the business entity, asset, GST registration, business use, cash flow and applicable tax rules.

TAFS primarily arranges chattel mortgage finance, while your accountant can determine how the purchase should be treated for tax purposes.

Is the Entire Asset Finance Repayment Tax Deductible?

Generally, businesses shouldn't assume the complete repayment is deductible.

The treatment of the asset purchase and the finance costs can be different. Your accountant can review the loan schedule and determine which amounts are eligible.

Can a Business Claim Depreciation on Financed Equipment?

A business that owns a depreciating asset used to produce assessable income may be able to claim eligible depreciation deductions, subject to the applicable rules.

Under a chattel mortgage, the business owns the asset from settlement while the lender holds security over it.

Does a Balloon Payment Increase My Tax Deduction?

A balloon changes the finance repayment structure rather than automatically increasing the available tax deduction.

Discuss the tax treatment separately with your accountant.

Does My Business Structure Affect Asset Finance Tax Treatment?

Your business structure affects your tax and reporting obligations, so it should be considered when determining which entity purchases and finances an asset.

Can Sole Traders Claim Business Asset Expenses?

Sole traders can generally claim eligible business expenses that meet the relevant deduction requirements. Private use must be excluded where applicable.

Should I Finance Equipment Before the End of the Financial Year?

The commercial need for the equipment should come first.

If timing is relevant to a planned tax deduction, speak with your accountant before settlement because the applicable rules can depend on when the asset is acquired and used.

Does TAFS Provide Tax Advice?

No. TAFS specialises in commercial asset finance.

We can help structure finance for trucks, vehicles, machinery and business equipment. Your accountant should advise on tax deduction strategies, GST, depreciation and the appropriate treatment for your business.

Structure Your Asset Finance With TAFS

Before financing a vehicle or piece of machinery, confirm the tax position with your accountant and then structure the finance around the business's cash flow, asset requirements and long-term plans.

TAFS can compare suitable chattel mortgage options through access to more than 80 lenders and manage the process through to settlement.

Contact The Asset Finance Shop or apply online at www.tafs.com.au.

The Asset Finance Shop (TAFS) is a commercial asset finance brokerage based in Sydney.
Information on this page is general in nature and doesn't take your personal circumstances into account. Speak to a TAFS broker for options tailored to your business, and to your accountant regarding tax treatment.