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Business Tax Tip – GST on Chattel Mortgage and GST – how it applies
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Published on Thursday, 10 November 2022 14:12
GST on a Chattel Mortgage is where GST applies for which you can claim a GST credit against the business incoming sales GST. If you are registered for GST, you may also be able to claim the GST that is contained in the vehicle's purchase price as input credit on your next Business Activity Statement.
1 What is a Chattel Mortgage?
A chattel mortgage is a security over chattels (that is, movable articles of property) held by the lender giving the lender recourse against the chattel in the event of default by the borrower.
It can allow a business to get a great deal, for example on car finance and possibly reduce their tax and GST outlay. Tax deductions businesses often take advantage of in a chattel mortgage include the chattel mortgage interest charges on the loan, the depreciation on the item (up to the depreciation limit) and running costs as a tax deduction.
Under a Chattel Mortgage Agreement, the Borrower agrees to borrow money from the Lender to buy goods from the Lender. However, under the terms of the loan, the Lender holds a mortgage interest in those goods; this means that if the Borrower defaults on the loan, the Lender has the right to acquire the goods. Usually the goods in question are valuable such as cars or business equipment. The borrower usually is subject to similar terms as in a Hire-Purchase Agreement.
2 Comparing Chattel Mortgage to Hire Purchase?
Under a chattel mortgage, the purchaser takes title in the chattel from the time of purchase. The purchaser (the borrower) finances the purchase price (or part thereof) to pay another party, for the chattel by way of a loan, obtained from a lender, and applies the borrowed funds as payment to the supplier for the chattel.
A hire purchase agreement is a contract for the hire/rent of goods where the lender takes title in the goods (remains with the financier/credit provider) over a series of payments and title does not pass to the purchaser until either the option to purchase is exercised by the purchaser, or the final instalment is paid.
3 How GST applies to a Chattel Mortgage
The ATO explains –
Where the purchaser accounts for GST on a non-cash basis (accrual) and the chattel purchased is a creditable acquisition, the purchaser is entitled to the entire input tax credit (of the item full value) in the tax period in which the invoice is received or any payment is made, whichever is the earlier. This is similar to that under a hire purchase agreement.
If the purchaser accounts for GST on a cash basis and the chattel purchased is a creditable acquisition, the purchaser is entitled to the entire input tax credit (of the item full value) in the tax period in which the purchaser applies the borrowed funds to make full payment of the chattel at the time of acquisition (executes the mortgage contract).
For more on the topic see ATO page - Hire purchase agreements and chattel mortgage
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