A tax-efficient financial structure for a business vehicle or piece of equipment is not simply the finance option that creates the biggest possible tax deduction.
The right structure needs to consider how the asset will be used, which business entity will own it, how much cash the business wants to retain, how GST and depreciation may apply, how the finance is repaid and what happens when the asset is eventually sold or traded.
For Australian businesses purchasing trucks, machinery and commercial equipment, tax treatment and finance structure are closely connected, but they are not the same thing.
The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for commercial vehicles, machinery and other income-producing business assets. Through access to more than 80 bank and non-bank lenders, TAFS can structure the finance around the business while the customer's accountant confirms the tax treatment that applies.
This guide explains how common asset finance decisions can affect deductions, GST, depreciation, ownership and business cash flow.
A tax-efficient financial structure is one that considers the available tax treatment without losing sight of the commercial needs of the business.
The aim should not simply be:
How do I get the biggest tax deduction?
A better question is:
How should we purchase and finance this asset so the ownership, repayments, cash flow and available tax treatment all work for the business?
That means considering:
A structure that creates a deduction but puts unnecessary pressure on cash flow is not automatically a strong financial structure.
TAFS primarily arranges chattel mortgage finance for eligible business vehicles, machinery and equipment.
Under a chattel mortgage:
Chattel mortgage finance can potentially be used for assets including:
Both new and used equipment can potentially be financed.
The asset purchase and the loan used to fund it are different parts of the transaction.
A financed asset can involve several separate tax considerations:
This is why the complete finance repayment should not automatically be treated as one tax deduction.
For example, a monthly chattel mortgage repayment generally includes:
Principal, which reduces the amount borrowed.
Interest, which is the cost of using the lender's money.
Those two components can have different tax treatment.
The asset itself is then considered separately for depreciation or other applicable tax rules.
Before choosing the finance structure, establish which entity should own the vehicle or equipment.
The business might operate as a:
The entity purchasing the asset can affect:
For example, an asset used by a company should not automatically be purchased personally simply because that appears easier at the time.
Likewise, moving an asset between entities later can create additional accounting and tax considerations.
Your accountant should confirm the appropriate ownership structure before settlement.
Tax treatment generally relates to the extent the asset is used to generate business income.
For many commercial assets, that may be straightforward.
A prime mover used exclusively for freight work may have a very different use profile from a ute that is also driven privately.
Potential business-use questions include:
Where private use exists, the available deduction may need to be adjusted.
Good records become particularly important where an asset has both business and personal use.
A common asset finance mistake is assuming the full loan repayment is deductible.
Generally, a chattel mortgage repayment contains principal and interest.
For example:
Monthly repayment: $4,000
That does not automatically mean:
Monthly tax deduction: $4,000
The principal component reduces the outstanding loan balance.
Eligible interest associated with an income-producing business asset may potentially be deductible.
The asset purchase is considered separately through depreciation or other applicable rules.
Your lender's repayment schedule can help your accountant identify the interest component.
GST is another important part of the overall asset purchase.
A GST-registered business may potentially be able to claim an eligible GST credit on the business-use portion of the asset purchase where the relevant requirements are satisfied.
The position can depend on factors including:
Where a GST-registered dealer sells the asset and charges GST, an eligible business may potentially have a GST credit available.
A private seller may not charge GST.
If no GST is included in the transaction, there may be no GST credit available on the purchase.
The truck, machine or equipment may still be financeable.
The GST position and finance approval are separate issues.
Because the business owns an asset purchased under a chattel mortgage, eligible depreciation may potentially be available.
Depreciation recognises that business equipment generally loses value as it is used over time.
The applicable deduction can depend on:
The finance term does not automatically determine the depreciation period.
For example, financing a truck over five years does not necessarily mean the truck must be depreciated over five years for tax purposes.
Finance and depreciation are separate calculations.
Some eligible lower-value business assets may qualify for the instant asset write-off where the relevant requirements are satisfied.
That does not mean every financed asset can be immediately deducted.
Most prime movers, rigid trucks, excavators and other major commercial assets cost well above the applicable instant asset write-off threshold.
Those assets are generally dealt with under the relevant depreciation rules instead.
Do not choose a vehicle or machine purely because somebody says it can be "written off."
Confirm with your accountant:
A deposit changes the finance structure.
For example:
Asset price: $150,000
Deposit: $30,000
Finance required: $120,000
Compared with financing the full purchase price, a larger deposit may reduce:
But it also uses more cash immediately.
That can leave less business capital available for:
Not automatically.
The deposit mainly changes the amount being financed.
The tax treatment of the asset itself is considered separately.
Using a $50,000 deposit instead of a $10,000 deposit does not automatically create a larger depreciation deduction.
The finance structure and tax treatment need to be considered separately.
A balloon is an amount of principal left outstanding at the end of the finance term.
For example:
Finance amount: $180,000
Finance term: 5 years
Balloon: $36,000
Because $36,000 remains outstanding at the end, the regular repayment is generally lower than it would be without the balloon.
This can preserve monthly cash flow.
A balloon may suit a business that wants to:
Not automatically.
A balloon changes when principal is repaid.
It does not create an additional deduction simply because part of the debt remains until the end.
A larger balloon may also mean more principal remains outstanding for longer, which can affect total interest cost.
The balloon should be chosen for commercial reasons.
The finance term has an important impact on cash flow.
A longer term generally produces:
A shorter term generally produces:
The term should consider:
Financing an older machine over a long period can leave the business making repayments on an asset approaching replacement.
The structure providing the largest deduction in one year is not automatically the best option.
Consider two businesses.
Has strong cash reserves and wants to repay equipment quickly.
Has a major new contract beginning and needs working capital for wages, fuel and suppliers.
Even if both purchase the same equipment, the appropriate finance structure may be different.
Business A may prefer:
Business B may prefer:
Tax treatment should support the commercial structure rather than dictate it.
Paying cash avoids finance interest.
It also removes cash from the business immediately.
Consider a $200,000 machine.
The business spends:
$200,000 upfront
There are no finance repayments.
But the $200,000 is no longer available as working capital.
The business may keep a much larger portion of that cash available while repaying the machine over time.
The business then incurs finance costs.
The right decision depends on what that $200,000 could otherwise do inside the business.
For example, it might support:
Neither paying cash nor financing is automatically more tax efficient.
The tax and cash flow outcomes need to be considered separately.
A tax-efficient financial structure should also consider the planned ownership period.
Ask:
The answer can affect:
For example, a business replacing trucks every five years might structure finance differently from one intending to operate them for ten years.
The tax consequences do not stop when the asset is purchased.
Eventually, the business may:
The accountant may need to consider:
This is another reason to keep clear records throughout the ownership period.
The amount of equity in an asset and its tax value are not the same thing.
For example:
Current truck market value: $150,000
Finance payout: $90,000
Approximate financial equity:
$60,000
That does not automatically mean the truck has a $60,000 tax value.
Loan balance, market value and depreciated tax value are separate figures.
This becomes particularly important when the asset is traded or sold.
Good record keeping makes the tax treatment of asset finance much easier.
Keep documents such as:
Your accountant can advise which records need to be retained and for how long.
Hire purchase follows a different ownership structure.
Under a traditional hire purchase arrangement, the provider generally owns the asset during the agreement, with ownership transferring according to the contract once the required conditions have been completed.
Under a chattel mortgage, the business owns the asset from settlement.
That ownership difference can affect accounting and tax treatment.
TAFS primarily arranges chattel mortgage finance, so hire purchase is included here for comparison rather than as a main TAFS product.
Rent to own also generally involves the provider retaining ownership during the rental period, with ownership potentially transferring later under the agreement.
A chattel mortgage provides business ownership from settlement.
Businesses comparing rent to own and chattel mortgage should consider:
TAFS primarily arranges chattel mortgage finance for eligible commercial assets.
It can be an appropriate structure for many Australian businesses.
One of its main features is that the business owns the asset from settlement.
From there, the tax result can depend on:
There is no universal rule making a chattel mortgage automatically the most tax-efficient financial structure for every business.
The advantage is that the finance amount, deposit, term and balloon can be structured around the business while the accountant advises on the tax treatment.
There is no single finance structure that produces the maximum tax deduction for every Australian business.
The result depends on factors including:
Trying to maximise the deduction without considering the commercial impact can produce a poor result.
For example, paying additional interest simply to create a larger interest deduction does not mean the business is financially better off.
The objective should be to minimise unnecessary cost while correctly claiming every deduction the business is entitled to.
More interest can potentially mean a larger eligible interest deduction.
That does not mean paying more interest is desirable.
For example, imagine two loans.
Interest cost: $20,000
Interest cost: $30,000
If the interest is eligible, Loan B may provide a larger deduction.
But the business has also paid an additional $10,000 of finance cost.
The tax deduction only offsets part of that cost.
Paying an unnecessary expense purely to claim a deduction rarely improves the overall position.
Not automatically.
A larger balloon can reduce monthly repayments and preserve cash flow.
It may also mean the business pays interest on a higher outstanding balance for longer.
The tax deduction associated with any eligible interest does not automatically make the larger balloon the better commercial option.
Compare:
Not automatically.
A larger deposit can reduce:
But it also uses more cash upfront.
Whether that makes sense depends on the business's working capital requirements.
Tax treatment of the asset is generally considered separately from the deposit amount.
Some finance-related fees can have tax consequences.
The treatment can differ depending on the type of fee and transaction.
Keep records of:
Your accountant should determine how each amount should be treated.
Sole traders can finance eligible business vehicles, machinery and equipment.
Potential tax considerations can include:
Record keeping can be particularly important where a vehicle or piece of equipment has both business and personal use.
The private portion generally needs to be separated from the business claim.
A company purchasing an asset needs to consider:
The finance application should also be made using the correct business structure.
Speak with your accountant before settlement if there is uncertainty around which entity should own the asset.
Commercial trucks can involve several tax considerations.
These may include:
TAFS primarily arranges trucks using chattel mortgage finance.
The finance can be structured around:
Your accountant can then determine the appropriate tax treatment.
Machinery finance follows similar principles.
For an excavator, skid steer, tractor or manufacturing machine, consider:
A long-life machine may support a different finance strategy from an asset expected to be replaced quickly.
Potentially.
A business asset does not necessarily need to be brand new for depreciation, GST or other relevant tax treatment to apply.
The position depends on:
For a private sale, GST may differ because the seller may not charge GST.
The finance itself can still potentially be structured using a chattel mortgage through selected lenders.
Yes, through selected lenders.
A private sale can require additional checks around:
Tax treatment should also be considered separately.
For example, GST on a private purchase may differ from a dealer purchase.
Before settlement, ask:
Once those questions are answered, TAFS can structure the finance around the commercial needs of the business.
Ask:
Tax and finance questions overlap, but they require different expertise.
TAFS handles the commercial finance.
Your accountant handles the tax advice.
TAFS reviews:
TAFS can assess:
TAFS begins with a soft credit check that leaves no formal enquiry on the applicant's credit file.
The internal credit team reviews the application before the formal lender submission.
TAFS has access to more than 80 bank and non-bank lenders.
Different lenders can have different criteria around:
TAFS can review:
Once an appropriate option is selected, the formal application is submitted to the chosen lender.
TAFS coordinates the remaining lender and seller requirements through to settlement.
A tax-efficient financial structure considers the tax treatment of an asset alongside ownership, finance cost, working capital and the broader commercial needs of the business.
There is no single structure that is best for every business.
There is no universal finance structure that automatically creates the maximum tax deduction.
The outcome depends on your business structure, asset, GST position, business use, depreciation, interest costs and applicable tax rules.
The objective should be to correctly claim available deductions while using a finance structure that makes commercial sense.
It can be suitable for many businesses.
Under a chattel mortgage, the business owns the asset from settlement.
Eligible interest, GST and depreciation may potentially be relevant depending on the business and asset.
Generally, no.
The repayment contains principal and interest.
Eligible interest may potentially be deductible, while the principal reduces the outstanding debt.
The asset is considered separately for depreciation and other tax treatment.
Eligible interest associated with an income-producing business asset may potentially be deductible.
The amount can depend on the business-use percentage and other circumstances.
Potentially.
A GST-registered business may be able to claim an eligible GST credit on the business-use portion of the purchase where the requirements are satisfied.
Potentially.
Under a chattel mortgage, the business owns the asset from settlement.
Eligible depreciation can depend on the asset and applicable tax rules.
Not automatically.
A larger deposit mainly reduces the amount being financed.
Tax treatment of the asset is considered separately.
Not automatically.
A balloon changes how the principal is repaid.
It does not create an additional deduction simply because it is paid later.
Not automatically.
Paying cash avoids finance costs but reduces working capital.
Financing retains more cash in the business but introduces repayments and interest.
The tax position and cash flow impact should be considered separately.
Not necessarily.
Eligible interest may create a deduction, but the business still has to pay the interest.
An additional expense does not become commercially beneficial simply because part of it may be deductible.
Yes.
The entity purchasing and using the asset can affect tax and reporting obligations.
Confirm the appropriate ownership entity with your accountant before settlement.
Potentially.
Eligible business-use expenses may be claimable.
Where private use exists, the relevant private portion generally needs to be excluded.
Potentially.
Eligible depreciation and other business deductions can apply to used assets depending on the circumstances.
Potentially.
If the seller does not charge GST, there may be no GST credit available on the purchase.
The commercial need for the equipment should come first.
If the timing of a tax deduction is important, speak with your accountant before settlement because the applicable treatment can depend on when the asset is first used or ready for use.
TAFS primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and business equipment.
No.
TAFS arranges commercial asset finance and can help structure the purchase price, amount financed, deposit, term and balloon.
Your accountant should advise on GST, depreciation, tax deduction strategies, deductible expenses and the tax treatment that applies to your business.
The best tax-efficient financial structure is not simply the one that produces the largest deduction.
The finance needs to work with the business's cash flow, asset ownership, working capital requirements and long-term plans while allowing the business to correctly claim the tax treatment available to it.
TAFS can compare suitable chattel mortgage options through access to more than 80 bank and non-bank 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.