Truck Finance: Chattel mortgage vs Novated lease

The right type of car financing can help anyone save thousands of dollars in the long run, business-owners included. Two of the most popular types of truck loans for businesses are the Chattel Mortgage and the Novated Lease. Both serve specific needs and can save you money.

The question is which one will work best for you? That’s what we’re here to help you figure out.

Chattel Mortgage

A chattel mortgage is almost similar to a secured car loan in that it is a fixed-term contract with a fixed interest rate, but with notable financial advantages to the latter including the benefits of ownership tax. The vehicle you purchase will be used as security for the loan, registered as a mortgage by your lender.

During the duration of the term, the vehicle is owned by you or your business. It is an asset that you are fully responsible for which means you will cover all its operating costs like registration, insurance, servicing, repairs, tyres.

Are the operating costs making you nervous? Don’t worry. Because the vehicle is a declared asset, you can claim tax deduction for these costs. If you will be using the car for both private and business purposes, it’s important to figure out the percentage in which the car is used for privately and for the business.

Are you considering buying a truck fleet for your business? We can help!

Chattel Mortgage Qualifications

One of the qualifications for a chattel mortgage is that the vehicle must be used for the business 51% of the time. Other requirements include:

  • Home ownership
  • If renting, you must be able to deposit at least 20% of loanable amount
  • The businesses must be at least 12 months old
  • An ABN and GST registration
  • A clean credit history

The chattel mortgage is a great option for tradies, self-employed individuals with an ABN, companies that need a company car or a fleet of vehicles, or businesses in need of industrial vehicles.

Chattel Mortgage Tax Benefits

Financing your vehicle purchase through a chattel mortgage can help you save money in a number of ways. First off, your ownership of the vehicles allows you to declare it as an asset on your balance sheet. Next, you can claim the GST on the initial purchase price on your next Business Activity Statement. And over the years, you can also claim the depreciation on the vehicle value in your tax return. Keep in mind also that all interest is tax-deductible.

A chattel mortgage also allows balloon payments which can help reduce monthly repayments and significantly aid you business’ cash flow.

Want to know what your truck loan repayments will be? Use our handy Finance Calculator to find out!

Novated Lease

In a novated lease, three parties are involved: the employer, the employee, and the lender. It works similarly to a finance lease — repayments are set over a fixed term and there’s a balloon or residual payment at the end. A novated lease provides an employee the opportunity to acquire a vehicle through a salary package. That means the employer will deduct the repayments for the lease from the employee’s paycheck.

Here’s another way a novated lease works differently: the lender won’t only take care of the vehicle purchase, it will also include an estimated running cost for the vehicle and any of the charges by the lender.

Novated Lease Qualifications

Any employee over 21 years of age, whether employed full-time or part-time, can sign a novated lease provided that the employer supports the agreement. The individual must also be able to prove his/her financial capability to make the repayments throughout the term. Are you under 21? Some lenders allow borrowers between 18-20 years old so it’s worth a try.

Novated Lease Tax Benefits

An employee who acquired a vehicle through a novated lease can skip paying the GST (10% of pre-GST value) on it — that’s a lot of money in the bank.

But how about the Fringe Benefit Tax? Fringe Benefit Tax applies to a novated lease and the employer shall be responsible for it. However, FBT can be effectively reduced to zero through the Employee Contribution Method which will be agreed upon the creation of the salary package. In ECM, all contributions taken out of the after-tax salary will reduce the FTB by exactly the same amount.

After the Term

At the end of the novated lease term, the individual can choose to pay the residual and keep the vehicle, or to sell, claim the profit tax-free, and enter a new novated lease agreement for a new vehicle.

If the employee leaves the employer during the term, the latter will remain responsible for the payments. The lease will be de-novated meaning the running costs will be removed from the agreement and converted to a standard car loan.

Should You Get a Chattel Mortgage or a Novated Lease?

It all boils down to what and who the vehicle/s are for. If you are looking for the best option to provide your employee with extra salary benefits, a novated lease is your best bet. It’s a win-win agreement in which you are helping an employee acquire a vehicle through affordable repayments at no cost to you. You can even claim back the GST you paid through ECM or as input tax credit.

If you are a business that’s looking for a vehicle or a fleet that will be central to your operations, opt for a chattel mortgage. Your business owns and can claim the vehicle/s as an asset. At the end of the term, you can choose to keep the car or to upgrade, whichever the business demands. You can also claim depreciation on the car’s value every year.

Vehicle Financing through Aussie Truck Loans

Both the chattel mortgage and the novated lease are offered by banks but Aussie Truck Loans understands you better. We specialise in helping businesses finance their fleets and other vehicle needs. Apply for a pre-approved loan via our quick loan application today, or contact us on 1300 769 999 to learn more about our truck loans and finance packages.

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