What Is A Chattel Mortgage?
If you are looking to purchase a new car, a Chattel Mortgage might be your best option. This product combines the best features of a traditional loan and a car lease to give the buyer great rates and tax incentives. It is intended to help businesses buy cars for company use without having to worry about taking out an actual loan and having to carry the burden of that loan on their books.
It also gives them the added benefit of actually owning the vehicle, unlike a lease, which also benefits the financial outlook of a business. Any business, whether it is a traditional company, a sole trader, or a partnership is eligible for this product. Self employed individuals, who can prove that the car will be used mostly for income producing business purposes can also take advantage of this great product.
Tax Benefits Of A Chattel Mortgage
The borrowers who will benefit the most from a Chattel Mortgage are those who are currently registered for GST on a cash accounting basis. This distinction allows the to take the GST of the purchase price of their new vehicle as an Input Tax Credit on the BAS. In addition, the GST is only charged on the actual purchase price and not on the monthly repayments or the final balloon payment on the car.
You may also claim a tax deduction on interest charges for the loan and on the depreciation of the vehicle. Depreciation claims can only be up to the depreciation limit. Keep in mind that in order to make these claims you have to be able to prove that the vehicle was mainly used for business purposes. This may mean providing mileage logs and petrol receipts when you submit your taxes.
How A Chattel Mortgage Works
Typically, when you purchase a vehicle you get a loan from a financial institution. The lender holds the title to the vehicle, so you will not own it outright until that debt is paid in full. With this type of loan, the borrower actually gets to own the car, referred to as a chattel, but the lender (finance company) is actually taking up the mortgage for the car.
They use an ASIC-registered Fixed and Floating Charge which is used to ensure that the loan is secure. The borrower then makes payments for a fixed time period to the financing company. The term for those payments is variable, ranging from two to five years. When the term is up the borrower can make a balloon payment and have the mortgage removed so they again fully own the vehicle. The customer can also choose to trade in the vehicle or to refinance for the remaining balloon value.
If you choose to refinance for the balloon value there are usually several options available to you, depending on what kind of vehicle you have and how old it is. One way to reduce the balloon value, the loan, and your monthly payments is to put down a deposit on the mortgage. Even if you do not choose to put down a deposit this option can be less costly because of the lower interest rate that you can secure. Since the loan is secured by the actual vehicle you can get a low and fixed interest rate. This means that you will spend less over the life of the loan and that you will not have to worry about your monthly payment rising should the market interest rates rise.
Another benefit to this type of loan is that the repayment schedule is designed to fit the needs of businesses. For example, if you have many other bills due at the beginning of the month which leads to tight cash flow, your repayment can be in the middle of the month or you could set it up to coincide with your bank deposits. Since the loan itself is designed to meet the needs of businesses the repayment plan is also designed to meet those needs.
A Chattel Mortgage might not be the perfect choice for every company. There are other options like leasing a vehicle or a commercial hire purchase that you should also investigate. In the end, the only person who can decide which option is best for your company is you. Keep in mind though, that getting a standard loan that is set up for personal use might not give you the tax deductions that one designed for a company would provide. Those tax deductions can save your company a significant amount of money.
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