One of the most commonly asked question in regard to business finance products is “is it tax deductible?” Business operators typically want to know that by entering into a business loan they are not only securing a solution for that acquisition or cost purpose but that the finance arrangement will deliver benefits to their bottom line. Tax deductions reduce the taxable income and tax payable by a business which can represent a significant cost saving.
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Selecting the commercial loan product which delivers the optimum outcome for your business in regard to taxation benefits is an important stage of the finance process.
We operate across the full portfolio of commercial lending and our team are experts in sourcing and structuring finance deals for asset acquisitions, property finance, lines of credit and general funding purposes. When it comes to the specific taxation arrangements of our customers we highly recommend referring to your accountant for advice. On your approval, your Business Finance consultant can liaise with your accountant to secure their direction on the preferred finance product that best suits your individual financial objectives and the nature of your operation.
The way the different tax elements, GST and deductions, are treated varies across different business finance products. The major differences occur in regard to asset acquisition finance products which include Chattel Mortgage, Equipment Leasing, Commercial Hire Purchase and Rent-to-Own. These are typically used as business loans for purchasing cars, motor vehicles, trucks, equipment, plant and machinery. We provide a simple explainer by comparing the commonly used loans that we are requested by our Business Finance customers – Chattel Mortgage, Equipment Leasing and Rent-to-Own.
Business Finance and GST
GST is not applicable to the interest portion of any business loan product, across the board. GST does apply to some of the fees and charges as applied by banks, brokers and lenders. These will be detailed to you at the time you secure a quote from us for your loan.
The treatment of GST on the purchase price of the asset and/or loan repayments differs for different business finance products.
- Leasing and Rent-to-Own: GST is applicable to the principal repayment portion of monthly lease payments and to any residual payable at the end of the loan term. Clarifying, as mentioned above, GST does not apply to the interest portion of the repayment. For businesses that are registered for GST, the GST component can be claimed on the corresponding BAS return. If you handle your own BAS returns, it may be advisable to ask your accountant or the lender to clarify exactly the GST amount in your monthly payments so you can accurately complete the BAS return.
- Chattel Mortgage: GST will be applicable to the purchase price of the asset – truck, car, equipment. In contrast to leasing where the GST is paid/claimed on monthly payments, with Chattel Mortgage for businesses, 100% of the GST on the purchase can be claimed on the following BAS statement. That is, the GST is considered as paid when the loan is finalised and can be claimed in that corresponding reporting period.As the GST has already been handled in that manner, it is not applied to the repayments except for any GST on fees and charges which may be incorporated into the repayments.
Tax Deductible Loan Elements
A business tax deductions is an expenditure that is approved by the ATO as a legitimate business expense and is deducted from income as a cost to arrive at the taxable income of the business. This is typically done when the end-of-year business accounts and tax return are prepared, usually by an accountant or tax agent.
All business finance products include a tax deductible element but how that tax benefit is realised varies depending on the loan type. For all loan types, the interest portion of a loan is considered as a tax deduction as are the fees and charges applicable to individual loans.
- Leasing and Rent-to-Own: With these types of business loans, the repayments are considered as an operating cost and as such are generally treated as a tax-deductible expense.
- Chattel Mortgage: The tax benefit with this type of loan is realised not in deducting the loan repayments but in the depreciation of the asset. The ATO set a schedule of what percentage of the purchase price/value of assets can be depreciated in a financial year. The business depreciates the asset by that percentage each year as per the schedule until the full amount is realised.
Depreciation does not apply to interest and loan fees as they are deducted as a business cost.
At times, such as during the coronavirus pandemic, the government introduces accelerated asset depreciation measures. An example of this is the Instant Asset Write-Off. This allows for the full value of the asset to be depreciated in the financial year of purchase rather than incrementally over an extended period. Read more here.
Securing Your Preferred Business Tax Solution
Different businesses will have varying approaches to their tax obligations and selecting the best finance solution to meet your objectives can impact your overall business financial situation. It’s worth noting that to be eligible for tax deductions, the goods being purchased must be approved for use in the business. This is relevant with motor vehicles through our business car loans. The ATO uses data sourced from state motor registry authorities to match new vehicle registrations against the tax obligations of businesses and individuals. Find out more
To secure a tax effective commercial loan for your business, discuss your requirements with Business Finance.
Contact our brokers on 1300 000 033 for all your requirements
DISCLAIMER: THE SPECIFIC PURPOSE IN PROVIDING THIS ARTICLE IS FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED AS THE SOLE SOURCE OF FINANCIAL INFORMATION ON WHICH TO MAKE FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADVICE OR GUIDANCE AROUND THEIR SPECIFIC FINANCIAL CIRCUMSTANCES ARE RECOMMENDED TO CONSULT WITH A FINANCIAL ADVISOR. NO LIABILITY IS ACCEPTED IN REGARD TO ANY MISREPRESENTATIONS OR ANY ERRORS RE ANY DATA, SPECIFICS, POLICIES AND OTHER INFORMATION AS SOURCED FROM OTHERS.