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Chattel mortgage – Tax and GST implications
January 14, 2021● 4 minute read●
Before entering into any arrangement, it’s essential to understand the implications. A chattel mortgage is a less popularly known method for acquiring a vehicle, and so not many people have a good grasp of it. If you own a business, you may have heard that it’s a better option because of the tax deductions and GST implications. In this article, we’ll take you through a deep dive of what does repercussions are, and whether a chattel mortgage is right for you.
Now let’s start from the beginning:
What is a chattel mortgage?
A chattel mortgage is a type of auto-loan that enables the borrower to acquire the funds to buy an asset (often a movable item such as a vehicle), through a lender who maintains holds the chattel as security until the loan repayments are complete. On completion of the payments, the borrower then receives full ownership of the vehicle. The arrangement is similar to a typical secured car loan, where the financier holds the car as collateral. But unlike that type of vehicle advance, it is not regulated by the National Credit Consumer Protection Act. Despite this extra layer protection, many still consider this type of arrangement viable because of benefits like flexibility, low rates, and of course tax deductions.
Who does it suit?
A chattel mortgage is a popular option amongst business owners, both big and small because there are several advantages for enterprises. If you’re a sole proprietor or part of a partnership or larger-scale company that utilizes cash method to track your business activities, you can claim vehicle’s GST.
How does it differ from a hire purchase agreement?
You might have come across sites that use the terms chattel mortgage and hire purchase interchangeably, but while they are similar, they are not the same. In the former, the title of the asset remains the name of the borrower at the purchase point. At the same time, the lender who funds the loan lists the chattel as security. In comparison, in hire purchase, the deed remains with the financier until the borrower completes their payment. That is the fundamental difference between the two. Despite the minor difference between the two, tax and GST implications remain relatively similar, and so we will treat them as such in the following sections.
Tax and GST implications
The law requires many businesses to register and pay for a Goods and Service Tax (GST). But when enterprises take on a mortgage, the government creates room for them to make claims. These apply to some of the funds they’ve paid during the repayment of the vehicle. What’s more, is that you can lodge it immediately at your next BAS as opposed to waiting till the repayments are complete.
How do I know which part of my agreement is eligible for GST?
According to the laws governing hire purchase agreements, all components of the chattel are completely taxable, independent of if the annual percentage rate. This provision is only for contracts that come into existence on or after the 1st of July, 2012. In other words, if you fall into this category, all aspects of your loan qualify for GST.
When are you qualified to an input tax credit?
One of the advantages of opting for a chattel mortgage is being eligible for a government input tax credit, which can help you acquire the vehicle faster. For borrowers that use a non-cash basis meet the qualification to have their total input tax credit during the period of the agreement. However, for purchasers that apply a cash basis to their GST, they are only entitled to a tax credit at the point of acquisition. It’s vital to hold your invoice at the when presenting your BAS for your claim to be valid, irrespective of the type of cash basis applicable.
What are the GST implications for obtaining the title?
According to ATO regulations, the borrower can gain full ownership of the chattel either by completing their repayments or opting for an early exit agreement. They qualify for a full tax credit of the last or balloon payment, regardless of whether the arrangement is a cash or non-cash basis. If the borrower opts for an early exit option, and the financier makes a rebate for the interest, the purchaser needs to make a decreasing adjustment. But that’s only in the instance of a non-cash basis.
Are there other advantages of a chattel mortgage?
Yes, there are other reasons to opt for this type of loan, apart from the implications we’ve discussed. Some of them are:
Lower charges: Hire purchase agreements are low risk for the lender, so they are often willing to lower their interest rates. More so, such loans do not include the ongoing fees which apply to the regular car advances.
Adjustable repayment timeline: Chattel mortgages are also more flexible because many financiers allow the option of a residual payment, which is a considerable part of the loan paid at the end of the term. Of course, you can decide not to use that option, and pay a fixed amount every month for the entire duration. You can also make room for irregular payments.
Build equity: Remember that this type of advance is popular in the business world, as such, you can list the chattel as the legal property of your enterprise, thus, creating equity for your business.
More working capital: The applicable depreciation and funds the borrower gets to save on charges using this sort of agreement, means more money in your pocket. That means individuals or companies as the case may be can dedicate more funds to other parts of their business.
As a final note, loans are legally binding contracts and failing to understand the terms will not absolve you from the responsibilities attached. Many of the tax and GST implications are favourable to the purchaser, but remember that some lenders will try to spin loopholes to their advantage. So it’s in your best interest to understand the terms clearly, and perhaps acquire an external consultant that can give you advice.
Written by Jacaranda Team