Choosing a tax-efficient financial structure for a business vehicle or piece of equipment starts before the finance application is submitted.
The business needs to consider which entity will purchase the asset, how much of it will be used for business, whether GST can be claimed, how depreciation may apply, what part of the finance cost may be deductible and how the proposed repayment will affect cash flow.
There is no single finance structure that produces the best tax outcome for every Australian business. The right setup depends on the business structure, asset, intended use, available working capital and long-term plans.
The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for trucks, commercial vehicles, machinery and other business assets. TAFS can help structure the finance amount, deposit, term and balloon, while your accountant should confirm the tax treatment that applies to your business.
Here are the key questions to ask before financing your next business asset.
Start by confirming which entity will buy and own the asset.
Depending on the business, this could be a:
The entity purchasing the asset may affect how the purchase, finance and eligible deductions are treated.
Ideally, the entity:
This should be confirmed before settlement.
Changing the borrower or purchaser after finance documents have been prepared can create additional work and may require the lender to reassess the application.
Which business entity should purchase and finance this asset?
Once that has been confirmed, TAFS can structure the finance for the appropriate borrower.
The tax treatment of a business asset can depend on how much it is actually used to generate business income.
Some assets may have close to 100% business use.
Examples could include:
Other vehicles may have both business and private use.
This can be particularly relevant for:
Where there is private use, eligible deductions may need to be adjusted to reflect the business-use percentage.
This can affect expenses such as:
What percentage of this asset can reasonably be treated as business use, and what records should I keep?
GST can make a meaningful difference to the cash flow surrounding a major asset purchase.
A GST-registered business may be able to claim an eligible GST credit when purchasing a business asset, subject to the circumstances of the transaction.
The position can depend on:
The seller matters.
For example, purchasing from a GST-registered dealer may have a different GST position from purchasing the same asset from a private seller.
Do not build an expected GST refund into your cash flow plan until your accountant has confirmed that it applies.
How much GST, if any, can the business claim on this particular purchase?
Purchasing a business asset does not automatically mean the entire purchase price becomes an immediate deduction.
Depending on the asset and the tax rules that apply to the business, the cost may be dealt with through depreciation or another available tax treatment.
Factors can include:
Larger business assets such as:
can remain in the business for several years, making depreciation an important part of the overall tax discussion.
How will this asset be depreciated, and when can the business begin claiming it?
This is an important distinction.
A chattel mortgage repayment generally includes both principal and interest.
The principal reduces the amount borrowed.
The interest represents the cost of borrowing.
The complete monthly repayment should not automatically be treated as one tax deduction.
The tax treatment of:
can be different.
For example, the asset may be depreciated while eligible business-use interest may be treated as a deductible finance expense.
Which parts of the finance repayment can the business claim?
Keep the lender's repayment schedule so your accountant can identify the relevant components.
Eligible interest associated with an income-producing business asset may be deductible depending on the circumstances.
For example, if a civil business finances an excavator that is used entirely for business work, eligible interest associated with that finance may form part of the business's deductible expenses.
If the asset has private use, the eligible interest may need to be apportioned.
The exact treatment depends on:
How should the interest component of the asset finance be treated?
Not automatically.
A deposit primarily changes the finance structure.
For example:
Asset purchase price: $150,000
Deposit: $30,000
Amount financed: $120,000
A larger deposit can:
However, it also removes cash from the business.
That money may otherwise be needed for:
A tax-efficient financial structure should also leave the business with enough working capital to operate comfortably.
Does changing the deposit affect the tax treatment?
How does changing the deposit affect the repayment and total finance structure?
Not automatically.
A balloon payment is an agreed amount of the finance that remains outstanding at the end of the term.
For example, instead of repaying the entire principal through monthly repayments, part of the principal can remain as the final payment.
A balloon can:
What it does not automatically do is create a larger tax deduction.
The balloon changes how the finance is repaid.
The underlying tax treatment of the asset is a separate matter.
Does the balloon change the tax treatment of the asset or finance?
What balloon, if any, makes sense based on the asset's expected future value and our cash flow?
The finance term should make sense for the asset and the business.
A longer term can reduce regular repayments.
However, it can also mean:
Consider an older truck.
A seven-year repayment may appear attractive because the monthly figure is lower, but the business could still be making repayments when the truck is approaching replacement.
The finance term should be considered alongside:
Does this finance term match how long we realistically expect to keep the asset?
Paying cash and using business asset finance have different cash flow consequences.
Paying cash can mean:
But it also means the business uses a large amount of its available capital immediately.
Financing can allow the business to:
The trade-off is the cost of finance.
Consider a business with $200,000 available in cash that wants to purchase a $150,000 machine.
Paying cash leaves $50,000.
Financing part of the purchase could leave significantly more capital available for operating expenses and future opportunities.
There is no automatic winner.
The business should compare the cost of finance with the value of retaining that cash.
What does the business need the available cash for over the next 6 to 12 months?
A tax deduction should support a commercially sensible purchase.
It should not be the entire reason for buying the asset.
Before proceeding, ask whether the asset will:
A deduction can reduce taxable income.
It does not remove the underlying cost of the purchase.
If the business does not need the equipment, buying it simply because there may be a tax benefit can still leave the business with unnecessary debt and operating costs.
The finance is only one part of owning a business asset.
Depending on the asset and business use, operating costs may include:
Some of these expenses may be deductible to the extent they relate to business use.
The exact treatment should be confirmed with your accountant.
For an owner-operator truck business, for example, the finance repayment needs to be considered alongside the costs of actually keeping the truck on the road.
A finance structure that looks affordable before fuel, tyres, maintenance and insurance are included may look very different afterwards.
Used business equipment can still have tax considerations around:
But the individual transaction matters.
For example, the GST position may differ depending on whether the equipment is purchased from:
The age and purchase price of the asset may also affect how it is treated.
Does buying this asset used rather than new change the tax treatment?
Potentially.
Private-sale equipment finance can be arranged through selected lenders, but the tax side of the transaction should also be considered.
A private seller may not charge GST.
The business should confirm:
On the finance side, a private sale can also require additional checks around:
TAFS can coordinate the finance requirements while your accountant confirms the tax treatment.
Tax planning should not stop at the purchase.
Eventually, the business may:
At that point, several figures can become relevant:
For example, a truck may be financed with the expectation that its trade-in value will help clear a balloon at the end of the term.
If its market value falls further than expected, the business could have a shortfall.
What happens for tax when the asset is eventually sold or traded?
Does the proposed balloon make sense against the expected value of the asset at the end of the term?
It can.
Businesses sometimes consider asset purchases around the end of the financial year because of potential tax treatment.
However, the timing rules and eligibility requirements can vary.
Do not assume that:
If timing is part of the tax planning strategy, confirm exactly what must happen before the relevant date.
Does the timing of this purchase affect when the business can claim depreciation or another available deduction?
Tax rules and thresholds can change.
Before making a significant vehicle or equipment purchase based on an expected tax outcome, ask your accountant whether any current concessions apply.
These could potentially relate to:
TAFS can arrange the finance, but tax eligibility should be confirmed separately.
Good records make the tax side of asset finance much easier.
Keep documents such as:
Ask your accountant which records need to be retained and for how long.
TAFS primarily arranges chattel mortgage finance for vehicles, machinery and other commercial assets.
Under a chattel mortgage:
Chattel mortgage finance can be used for eligible assets including:
The business may be able to claim eligible GST, interest and depreciation amounts depending on its circumstances.
Your accountant should confirm the treatment that applies.
It can be an appropriate structure for many Australian businesses.
One of the defining features of a chattel mortgage is that the business owns the asset from settlement.
From there, the tax outcome can depend on:
There is no single answer that makes a chattel mortgage automatically the most tax-efficient structure for every business.
The structure should be assessed alongside the business's tax position and cash flow.
Potentially.
Under a chattel mortgage, the business owns the asset from settlement.
Eligible depreciation may therefore apply depending on:
Your accountant should determine the amount and method that applies.
Eligible interest associated with an income-producing business asset may be deductible depending on the business and percentage of business use.
The principal portion is treated separately.
The lender's repayment schedule can help your accountant identify the interest component.
Potentially.
Sole traders can finance eligible vehicles and business equipment and may be able to claim relevant business-use expenses.
Where the asset also has private use, that portion should be separated.
Keeping clear records is particularly important where a vehicle is used for both business and personal purposes.
There is no universal structure that provides the best result for every business.
The answer depends on:
The strongest approach is usually to have your accountant confirm the tax position and then have the finance structured around the commercial needs of the business.
Before financing the asset, ask:
Once the tax position is understood, ask TAFS:
TAFS focuses on the finance side of the transaction.
TAFS looks at the asset, purchase price and intended business use.
The business history, available documentation and proposed finance requirement are reviewed.
TAFS begins with a soft credit check that leaves no mark on the applicant's credit file.
The internal credit team assesses the application before a formal lender submission.
TAFS has access to more than 80 bank and non-bank lenders.
The finance amount, deposit, term and balloon can be considered around the asset and business cash flow.
Once the business selects an option, TAFS manages the formal application and settlement process.
TAFS provides commercial asset finance rather than tax advice.
Your accountant should confirm GST, depreciation, deductible expenses and the tax treatment of the purchase.
A tax-efficient financial structure considers the tax treatment of a business asset alongside ownership, cash flow, finance cost and the long-term needs of the business.
There is no single structure that is best for every business.
Ask who should purchase the asset, how much will be used for business, whether GST can be claimed, how depreciation will work, how finance interest will be treated and what happens when the equipment is later sold or traded.
The complete repayment should not automatically be treated as one deduction.
Principal, eligible interest and the asset purchase can have different tax treatment.
Eligible interest relating to an income-producing business asset may be deductible depending on the circumstances and business-use percentage.
Potentially.
Under a chattel mortgage, the business owns the equipment from settlement. Eligible depreciation will depend on the business, asset and applicable tax rules.
Not automatically.
A balloon changes how the finance is repaid. It does not by itself create an additional deduction.
Not automatically.
A larger deposit mainly reduces the amount being financed.
The tax treatment of the asset is considered separately.
Potentially.
The position depends on the business, asset, seller, transaction and business-use percentage.
Your accountant should confirm the GST treatment before you rely on an expected credit.
Neither is automatically better.
Paying cash avoids finance costs but reduces available capital.
Financing preserves more working capital but introduces interest and repayments.
The tax position and cash flow impact should be considered separately.
Yes.
TAFS primarily arranges chattel mortgage finance for commercial vehicles, machinery and other business assets.
No.
TAFS arranges commercial asset finance and can help structure the finance amount, deposit, term and balloon.
Your accountant should advise on tax deduction strategies, GST, depreciation, deductible expenses and the correct treatment for your business.
A tax-efficient financial structure should also make commercial sense.
Before financing a vehicle or piece of equipment, confirm the tax position with your accountant and then structure the finance around the asset, business cash flow and long-term plans.
TAFS can compare suitable chattel mortgage options through access to more than 80 lenders and help structure the finance amount, deposit, term and balloon around your business.
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.