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What is The Most Tax-Effective Way to Buy a Car?

Written by

Shaun McGowan

There are several types of car finance in Australia, each with its terms and pros and cons.

The type of vehicle you buy, as well as its age and other factors, will determine how much interest you’ll pay over the loan term, but choosing the right type of finance at the start can also offer GST savings and tax reductions.

Today we’ll look at the three options most Aussies are familiar with:

Some types of finance are more suitable for certain vehicles than others, while others are tailored to accommodate businesses requiring an entire fleet of company cars.

1. Novated Lease

A novated lease is only used by employees who are paid a salary, or business owners who pay themselves a salary from their own company, and includes the cost to finance a vehicle and its associated running costs.

The lease is managed and estimated by a novated lease finance company and if your employer agrees to a novated leasing programme, you can choose most types of vehicles.

Novated Lease Package

Novated Lease Tax Benefits

A novated lease uses your pre-tax and post-tax salary to make finance repayments to a leasing company, and those pre-tax payments reduce your total taxable income. This could put you into a lower tax bracket, resulting in significant tax savings.

Secondly, as the leasing company procures the vehicle, you won’t pay GST on the initial purchase price of the vehicle. GST included in the lease charges can be claimed by the employer, which is then passed on to you when leasing the vehicle.

2. Chattel Mortgage

A chattel mortgage is a type of vehicle finance used by sole traders and businesses to purchase a vehicle and offers several immediate and ongoing benefits.

They can be used to purchase company cars or delivery vehicles and heavy machinery, but shared personal-work vehicles must be used for business purposes at least 51% of the time.

Small business loans with Money Matchmaker

Tax Benefits

A chattel mortgage allows sole traders and businesses to claim depreciation on the vehicle as a business asset, and interest on repayments is also tax-deductible. Chattel mortgages are only used to finance business vehicles, which allows a business to immediately take advantage of the tax benefits of ownership.

If your business is registered for GST on a cash basis and uses a chattel mortgage to purchase a vehicle, the vehicle becomes an asset on the business’s balance sheet and you can claim the initial purchase-price GST back on your next Business Activity Statement (BAS) following the establishment of the chattel mortgage. This is a huge instant saving.

3. Car Loan

A car loan is a fixed-term, fixed-rate vehicle loan secured by the purchased vehicle, and not tied to the borrower’s employment situation. They do not provide the same unique GST benefits as a novated lease or chattel mortgage. However, they allow you to purchase a car with no restrictions on use and the fewest limitations on vehicle choice.

A car loan is available from banks, dealerships, car loan lenders, and vehicle brokers, so you’ll get the most options for choice and the most freedom. The car loan can include on-road costs and insurance, however as the loan is secured only by the vehicle itself, this may incur additional fees.

Finding a car loan through a car dealership

Summary of the most tax effective way to purchase a car.

A novated lease, chattel mortgage, or car loan are all used to finance vehicles but do not offer the same types of benefits to all people in all situations, particularly when it comes to business GST and tax savings.

Novated leasing and car loans allow full personal use and ownership of the vehicle, while a vehicle obtained through a chattel mortgage is owned by a business, registered as an asset, and must be used for business purposes at least 51% of the time.

Both a novated lease and chattel mortgage offer specific GST and tax benefits; employees benefit from a novated lease, while a business or sole trader will benefit from a chattel mortgage.

A novated lease also provides borrowers with certain GST and tax benefits that are not available under a standard car loan agreement, which provides few business-related benefits over the other two options.

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The easiest way to find a competitive loan from lenders is to simply use our Money Matchmaker® engine. We’ll compare the best car loans we can find from our available pool of lenders, personalised entirely based on a few simple questions.

You can see exactly how much you’ll pay with each lender - this includes all the little details like fees and restrictions, so you can find the offer that suits your lifestyle the best.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.