When deciding whether to buy a vehicle with finance or cash, the best option depends on your business structure, cash flow, and long-term tax planning goals.
Paying cash means you own the vehicle outright from day one, avoiding interest and loan commitments. It’s simple, cost-effective, and there’s no ongoing liability. However, it also ties up valuable capital that could otherwise be used for business growth or investment. If the vehicle is used for business purposes, you can generally claim tax deductions for depreciation and running costs—but not for interest, since no finance is involved.
Financing the vehicle—through a chattel mortgage or hire purchase—can provide flexibility and potential tax benefits. The interest and depreciation (or instant asset write-off, if eligible) are generally tax-deductible based on the business-use percentage. It also helps preserve cash flow by spreading the cost over time. However, many finance agreements include a balloon payment at the end of the term. While this reduces monthly repayments, it can create significant cash-flow pressure later if you decide to keep the vehicle instead of trading it in or refinancing.
A novated lease is another popular option—especially for employees who use their car for both business and personal use. Under a novated lease, your employer makes the lease payments from your pre-tax income, reducing your taxable income and simplifying running costs such as fuel, insurance, and maintenance. Similar to hire purchase agreements, novated leases often include a residual or balloon payment at the end of the term. While this lowers initial repayments, it can lead to a substantial cash-flow hit when you choose to retain the vehicle.
Ultimately, there’s no universal answer. If your business values liquidity and you want to maximise deductions through financing, a chattel mortgage or novated lease might be ideal. But if you prefer simplicity and full ownership without long-term obligations, paying cash could be the smarter move.
Tip: Before deciding, consult your Investax tax advisor to assess how each option affects your cash flow, Fringe Benefits Tax (FBT) exposure, and your broader business tax position.
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