Note: This is not advice. Please look at it as a guide only and get specific advice from your own Tax Agent or Lawyer.

Question: I am Cash Based for GST. I need to buy a new car (or piece of business equipment). What is the difference between a Lease a Hire Purchase or a Chattel Mortgage? And how do I treat them in my accounting software?

 

a)        CHATTEL MORTGAGE

For a business that is cash based for GST a Chattel mortgage is a very good option to investigate, as you are able to claim the GST on the purchase of the car/equipment (for the business % of use) up front at the time you make the purchase, which gives you a nice cash flow bonus. Most finance companies and all banks offer Chattel Mortgages.

With the Chattel mortgage you get a higher tax deduction in the first year or two (in the first year it is often higher than the repayments you actually make, which again is a cash flow bonus (and therefore higher than it would be for a lease)) however with a Chattel Mortgage your deduction gets smaller and smaller each year so by the last couple of years your tax deduction would be lower than that of a lease. Over the life of the finance it all works out about the same.

When you are entering a Chattel mortgage repayment in to your Accounting system you will record the payment against a Chattel Mortgage LIABILITY account. You will not use a tax code at all for the entry if you use Reckon Accounts, and you will use the N-T (No Tax) code if you use MYOB.

You will also need to record the purchase of the asset itself against an Asset Account (with a Capital GST code ie. CAG (RAooks) or GCA (MYOB)) and the total Chattel Mortgage against a liability account.  I usually do this using a journal entry.

Your Tax Agent will depreciate the asset at the end of the year (the payment itself is not tax deductible).

b)        HIRE PURCHASE

If you are cash based for GST and you choose the Hire Purchase option for finance, you will not be entitled to claim the GST up front, but instead must claim it on each Hire Purchase payment that you make. This means you miss out on the upfront cash flow boost that you could receive from other methods of finance, and is also the most complicated form of finance to deal with from a bookkeeping perspective.

With the Hire purchase, just like with a Chattel Mortgage you get a higher tax deduction in the first year or two (in the first year it is often higher than the repayments you actually make, which is a cash flow bonus (and therefore higher than it would be for a lease)) however with a Hire Purchase your deduction gets smaller and smaller each year so by the last couple of years your tax deduction would be lower than that of a lease. Over the life of the finance it all works out about the same.

When you are entering a Hire Purchase repayment in to your Accounting system you will record the payment against a Hire Purchase LIABILITY account. You will need to calculate the total GST that you can claim on the asset purchase itself, and divide it by the number of Hire Purchase repayments. This is the amount of GST you can claim on each repayment. It will not be 1/11th of the repayment as part of the repayment is for Hire Purchase charges which are GST free.

To record this in your accounting system you will need to record the Hire Purchase repayment over two lines. On the first line you will record the amount that includes GST and use the non-capital acquisition GST tax code (ie NCG (RAooks), GST (MYOB)).

On the other line you will enter the remaining amount of the repayment and use the non-capital acquisition GST Free tax code (ie. NCF (RAooks), FRE (MYOB)).

You will also need to record the purchase of the asset itself against an Asset Account (with no tax code (RAooks) and the N-T code (MYOB)) and the total Chattel Mortgage against a liability account. I usually do this using a journal entry.

Your Tax Agent will depreciate the asset at the end of the year (the payment itself is not tax deductible).

c)        LEASE

The main advantage of a lease is that it is the simplest option from a bookkeeping perspective. If you choose a lease, you will NOT be able to claim the GST on the equipment up front, like with a Chattel Mortgage, but rather you claim the GST as you go on each payment. Also with a lease it is the lease payment itself that is tax deductible (so long as the equipment is being used for business purposes) (in contrast to the other options, where the payment is NOT deductible but the asset itself is depreciated).

Your tax deduction for the lease is for the actual lease payment (or the % your can claim as business) each time and therefore is the same deduction from the beginning of the lease right through to the end.

 

When you are entering a Lease payment in to your Accounting system you will record the payment against a Lease EXPENSE account and will use the non-capital acquisition GST tax code (ie NCG (RAooks), GST (MYOB) to record the expense.

Unlike with the other options, you will NOT record the purchase of the asset itself against an Asset Account as you do not OWN the asset, but are simply leasing (renting)it.

Your Tax Agent will claim the lease expense itself at the end of the year (there will be NO Depreciation on the asset).

 

ADDITIONAL NOTE

Remember if you sell or Trade-in your old car or equipment you need to show the money from the sale of the car on your BAS and in your Tax Return, whether the sale is private or to a car yard or a Trade in on a new car. Don't forget you have to add GST to the sale price of the car (if it goes to a car dealer they will know this, so long as you tell them it is a business car).