Finance Products Compared
Benefits and Characteristics of Finance Options
Benefits | Characteristics | Rental | Operating Lease |
Finance Lease | Hire Purchase | Chattel Mortgage | Novated Lease | Consumer Loan (No commercial use) |
---|---|---|---|---|---|---|
Value that can be financed | Total value of the equipment should be financed. | Total value of the equipment should be financed. | Deposit can be paid, but not mandatory. An amount up to 100% can be financed. | Deposit can be paid, but not mandatory. An amount up to 100% can be financed. | Total value of the vehicle, reisdual mandatory. | Total value of the equipment, deposit can be paid but not mandatory. |
Accounting treatment | Liability NOT on customer’s balance sheet if complies with accounting standards. | Liability on customer’s balance sheet. | Liability on customer’s balance sheet. | Liability on customer’s balance sheet. | Ownership with financier, tax benefits sit with customer, repayments made by employer pre-tax. | Not Applicable. |
Interest | Not claimed by customer. | Not usually claimed by customer (see below. | Claimed by customer. | Claimed by customer. | Claimed by customer. | Not usually claimed by customer |
Title/Depreciation | Title with Lender. Depreciation available to Lender. | Title with Lender. Depreciation available to Lender. | Complex, but rights of title with Hirer (Customer). Tax deduction for Hirer. | Title with borrower. Tax deduction for Borrower (Customer). Goods mortgaged to financier. | Title with financier & cannot claim deprectiation. | Title held with customer. Depreciation not applicable. |
Tax effect for user | Payments may be deductible for Lessee (Customer) to the extent the asset is used in producing assessable income. | Ask for professional advice. Payments may be deductible for Lessee (Customer) to the extent the asset is used in producing assessable income. Alternatively, interest and depreciation may be claimed instead. | Hirer claims tax deduction for interest on contract plus depreciation of asset to the extent the asset is used in producing assessable income. | Borrower claims deduction for interest on the loan plus depreciation of the asset to the extent the asset is used in producing assessable income. | Salary deductions provide opportunity to reduce your tax, as payments are made from pre-tax (PAYG) income, which reduces your taxable income. A novated lease will attract Fringe Benefits Tax (FBT). | Not usually claimed by customer |
Residual/Balloon | There is no disclosed residual or balloon. | Residual is mandatory and is an estimate of value at end of term Lessee indemnifies the Lender (Lessor) for residual. | Balloon payment is optional. | Balloon payment is optional. | Balloon Payment is mandatory. | Available at lenders discretion. |
Payments regime for larger transactions, e.g more than $250,000 | Payments may be in advance or arrears. Rate fixed for the term of the contract. Monthly quarterly and seasonal available. | Payments may be in advance or arrears. Rate fixed for the term of the contract. Monthly quarterly and seasonal available. | Payments may be in advance or arrears. Rate fixed for the term of the contract. Monthly quarterly and seasonal available. | Payments may be in advance or arrears. Rate fixed for the term of the contract. Monthly quarterly and seasonal available. | Not usually applicable for vehicles in this price range. | Not usually applicable for assets in this value range. |
Payments regime for smaller to medium transactions eg. less than $250,000 | Fixed, floating, capped, range or any combination. | Fixed, floating, capped, range or any combination. | Fixed, floating, capped, range or any combination. | Fixed, floating, capped, range or any combination. | Advance or arrears, paid from PAYG salary as pre-tax decuction. | Advance or arrears, monthly, fortnightly or weekly repayments. |
GST Issues and Input Tax Credits (ITC) | Lender purchases equipment and claims an ITC. Repayments are calculated on the GST exclusive price. | Lender purchases equipment and claims an ITC. Repayments are calculated on the GST exclusive price. | Liability to GST arises at the time of supply of equipment. The GST amount can be paid up front, funded or paid as well as the repayment that coincides with the Hirer’s ITC claim. | Borrower acquires goods directly from the supplier and claims ITC as per a normal purchase. | Under a novated lease, the financier applies an Input Tax Credit (ITC) to remove the GST from the amount financed. This means that your repayments will be lower as you finance a reduced, GST-exclusive amount. | Borrower acquires goods directly from the supplier, claiming ITC is not applicable. |
GST payments | GST is added to the amount paid by the lessee for the rentals, residual and any purchase of the asset. Lessee/Borrower can generally claim any GST paid as an ITC. | GST is added to the amount paid by the lessee for the Lease payments, residual and any purchase of the asset. Lessee can generally claim any GST paid as an ITC. | As GST is assessed on the equipment when it is supplied, the customer is subsequently liable for GST on the stamp duty component of any repayment. No GST liability for the balance of repayment, balloon or final transfer of the asset to the customer. | There are no GST consequences on repayments, balloons or pay out. | No GST. A novated lease is GST free. You pay no GST on the vehicle purchase price, on fuel or on service and repair costs. | Not Applicable |
Disadvantages | No GST claimable up front. | No GST claimable up front. | General view is that no GST claimable up front if your account on a cash basis. GST is charged on interest costs. | GST claimable up front. But nearly always a charge has to be registered with ASIC and therefore borrowing becomes public knowledge. | You might liable for the car if you lose or change your job, Administration fees and higher interest rates often apply | No GST Claimable or ITC credits, product is consumer based designed for no business use |
Success Stories
As a small business owner for five years, obtaining finance for a new office building for our architectural practice appeared to be a daunting process from the outset. I managed to obtain referrals from various colleagues and went through a stage of meeting with several brokers. From our initial meeting, Brett very rapidly developed an understanding of the nature of how our business operated, by asking a series of direct and educated questions. I found this understanding of our business to be a significant key in the recommendations Brett made with respect to the available finance options. This was the factor which eventually helped us choose our finance broker.