Chattel Mortgage for Temporary Full Expensing & IAWO

After months of mentions in the financial news, several deadline changes and constant reminders from lenders (including Jade Equipment Finance), equipment manufacturers and sellers, Instant Asset Write-Off (IAWO) has been well-promoted to businesses. With temporary full expensing announced in the Federal Budget, investment allowance measures have been expanded to be available for more businesses and for an extended period than IAWO.

Many businesses are keen to realise the tax deductible benefits of these Budget investment allowances with interest focussed on selecting the appropriate type of finance. Jade Equipment Finance provides Chattel Mortgage as a finance facility to utilise these depreciation-related measures. As one of the most commonly used types of finance for many businesses for equipment purchases, there are still those looking to get their head around the detail. We oblige with this simple explanation.

Balance Sheet Issues

Both IAWO and temporary full-expensing are measures to ‘write-off’ or fully claim tax deductions on assets in the year of purchase. In order to do that, the equipment assets must be owned by the business. That is, not just in terms of you having full use of the equipment but the equipment must be entered in the business balance sheet. If you don’t own it, you can’t depreciate it!

Equipment Leasing and Rent to Own are known as off balance loans because the equipment is purchased by the lender and leased/rented back to the borrower. The equipment is not entered in the purchaser’s balance sheet. Therefore, these are not suitable finance products for depreciation measures. But they do offer other tax benefits.

In comparison, with a Chattel Mortgage loan the business actually buys the equipment and the finance lender takes a mortgage over the loan, using the equipment as security. So the equipment is listed as an asset/liability by the buyer and can be depreciated.

This is a simple comparison for the purpose of highlighting the balance sheet implications and suitability of finance types for investment allowance measures. All finance facilities have tax deductibility in some form. Businesses should always consult with their financial advisor or accountant on their specific circumstances.

Chattel Mortgage Detail

While the name may cause some confusion, Chattel Mortgage has quite a straightforward loan structure. ‘Mortgage’ can be the source of any misunderstandings as this term is more commonly associated with home loans. To clarify, some lenders including the CBA refer to Chattel Mortgage simply as an Equipment Loan.

The structure is quite straightforward:-

  • Lender extends finance and uses equipment as security against the loan.
  • Borrower repays loan in monthly repayments over the loan term.
  • A balloon is optional. This is a percentage of the loan (which may be the total purchase price of the equipment) which is not included in the repayment instalments but due for payment at the end of the loan term.

Once the finance contract is settled and equipment purchase finalised, the buyer takes ownership and full use of the equipment.

Taxation Treatment

The way tax is approached differs with different loan types and this is where the suitability of finance product and investment allowance measures comes into play.

First the GST. With a Chattel Mortgage loan, because the buyer is taking ownership of the equipment, they can claim the GST in full on the equipment purchase price immediately. That is, on the BAS return after purchase.

With all the GST claimed upfront, no further GST is applicable to the repayments or balloon.

This is in contrast to Leasing where GST is applicable to the monthly lease payments.

Now for the all-important tax deductibility. With Chattel Mortgage, only the interest is tax deductible in regard to the repayments and balloon. Under normal ATO rulings, the borrower receives the tax benefit in depreciating the equipment as an asset at the end of each financial year. Usually, an asset is depreciated by a certain percentage each year over a number of years. These amounts are set by the ATO and this is handled by your accountant in preparing your annual company accounts.

Under the IAWO and temporary full expensing rulings, the borrowing business can bring forward that depreciation to claim the full purchase price as a tax deduction in the year of purchase. Subject to all the eligibility criteria.

Chattel Mortgage works with the cash accounting method which is used by many Australian businesses.

Jade Equipment Finance Benefits

In sourcing and structuring your Chattel Mortgage equipment finance, your Jade consultant will source the cheapest deal from across our vast lending panel. This is especially pertinent to securing the cheapest equipment loans interest rates.

Our Chattel Mortgage deals include fixed elements to provide certainty to business moving forward:-

  • Cheap interest rates, fixed for the entire loan term.
  • Loan term fixed with terms negotiated.
  • Fixed monthly repayments and balloon.

If you are interested in purchasing new equipment to take advantage of the budget investment allowance measures, have a chat to your accountant to run through the benefits for your business then speak with Jade about a great finance deal.

For a Chattel Mortgage quote, contact Jade Equipment Finance on 1300 000 003

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