Motor Vehicle Ownership Options September 2014

Disclaimer This webinar is of a general nature only. Please obtain specific advice on client situations as minor changes in facts may result in significantly different outcomes. This webinar does not purport to cover all aspects of tax law relevant to the topics covered.

Vehicle Options
Multiple options for vehicle ownership: finance lease, operating lease, hire purchase, outright acquisition
Each has differing tax outcomes
Often asked, should I buy the vehicle or my company? Should I lease or buy?
Most often arises in the context of a shareholder employee and privately owned company = focus for today

1

Vehicle Options
Trade off (for tax) generally between FBT and non-deductible component
Company ownership = fully deductions and full GST input, but pay FBT plus pay GST on value of fringe benefit
Individual ownership: no FBT but only the business use percentage is claimable for income tax and GST
Focus on tax issues but obviously there are commercial considerations to any decision

Lease/Ownership Products
Hire Purchase or Conditional Purchase Agreement – mostly used when purchasing vehicle through a dealer
Security Agreement – vehicle already owned & used as security to raise funds
Finance Lease – Lease to own, Vantage Lease*
Operating Lease – new vehicle incl maintenance
Fleet Financing

Lease/Ownership Products
Leasing being used more and more – Preservation of working capital – Greater ROI (borrowed funds cheaper than equity) – Funding of growth – Retain cash flows to repay private debt – Living on credit

2

Lease/Ownership Products
Flexibility of leasing arrangements: ability to influence GRV and monthly payments, deposit or no deposit
Interest on finance lease/security agreements generally lower than operating leases (commercial risk with lessor in operating lease)

Finance v Operating Lease
Critical to distinguish between operating leases and finance leases. Tax treatment very different
Finance lease = acquisition with loan back
Acquisition = depreciation claimed
Loan means lease payments = principal & interest
Operating lease: a lease entered into on or after 20 May 1999 which is not a finance lease

Finance v Operating Lease
Finance lease defined in sYA 1 as a lease which when entered into – Involves the transfer of ownership of the vehicle to the lessee or associate, or – Provides lessee or associate an option to buy at substantially less than market value, or – Term of the lease is more than 75% of useful life (45 months max for vehicle)
There are other requirements but transfer of ownership and term are the main ones

3

Finance v Operating Lease
Many “finance leases” do not fall into the tax definition of finance lease. Often no transfer of ownership nor an option to acquire
Many have GRV but this doesn’t necessarily mean an option to acquire exists
Tip #1: read the agreement
Most “finance leases” will be considered a finance lease for accounting purposes: a lease where substantially all of the “risk and rewards” of ownership pass to lessee

Finance v Operating Lease
Watch out for consecutive and successive operating leases
If same lease asset leased to same lessee (or associate) under 2 or more leases, IRD may treat as a single lease
Effect = treated as finance lease from day one
Transitional adjustment (PhD in Math?) required

Leases & GST
Two main categories: hire purchase or agreement to hire
HP requires ownership to pass : Finance lease is generally a hire purchase agreement. GST on purchase & sale
Agreement to hire = operating lease: GST on monthly lease payments
Credit contracts – proverbial dogs breakfast. Choice to treat lease payments as 100% GSTable or treat interest component as GST exempt

4

Tax Efficient Options a) Company ownership: full income tax deductions & GST inputs but … FBT unless employ methods top reduce FBT b) Personal ownership: tax free reimbursement of actual expenses for business use


Within these options, clients can buy outright, finance/borrow to buy, finance lease, operating lease

Tax [in]Efficient Options


Reimbursement at IRD mileage rates: generally where low business use. GST leakage as no GST inputs on mileage rates




Straight cash allowance – no GST inputs




LTCs: Most owners will not be employees so “tax free reimbursement” not available – Apportionment of expenses & GST in LTC, or – Charge from individual to LTC for business use: income less expenses = $0 (practically the same as a tax free reimbursement)

Me or the Company?
Trade off between – full deductions and full GST inputs but FBT, or – sacrifice a non-deductible portion of expenditure to avoid FBT

5

Company Ownership
Can lease or purchase
Company entitled to full income tax deductions
Company entitled to full GST input on purchase and costs, but GST output on sale
Company will have an FBT exposure
Can charge the shareholder employee for the use of the vehicle, reducing the taxable value of the FB, limit private use, work related vehicle

Company Ownership
Charge by company to shareholder employee is – A taxable and GST-able amount for the company, – A non-deductible amount for the shareholder employee
Ability to limit FBT where genuine private use restrictions imposed

Company Ownership
Advantages: – Ability to reduce FBT (private use restriction) can significantly reduce overall cost – No log book keeping
Disadvantages: – Employee leaves and company is left with unwanted vehicle – Residual value risk lies with company – Risk of FBT

6

Personal Ownership
Shareholder employee buys or leases in their own name
As an “employee”, they are entitled to a tax free reimbursement of actual costs (sCW 17)
Based on business use percentage established by a log book
Reimbursement is tax deductible to company
Change to law in 2008 now allows depreciation to be reimbursed tax free so impediment to owning vehicles removed

Personal Ownership
GST inputs available to company in relation to GST-able amounts reimbursed (usual invoice keeping requirements apply)
Advantages: – Risk of ownership with shareholder employee
Disadvantages: – Log book required – Portion of expenses non-deductible for income tax and GST

Lease or Buy?
Commercial issues, not tax
Interest rate on operating lease sometimes higher than under finance lease/acquisition (depends on credit rating)
Risks and rewards of ownership
Cancellation costs
Reconditioning costs
Lending covenants/off balance sheet
Cash flows

7

Vehicle Example
Cost of vehicle $90,000 plus GST, $103,500 incl
Interest rate on finance/loan = 9%
Interest rate on operating lease = 11%
Residual value 35%, term 45 months
FBT: 7 days per week, FBT rate 49.25%
Depreciation = 21% SL
Running costs $6,000 p.a.
Business use = 75%

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Tax Finance Lease: E’ee Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Average Cost (SL Depn + Interest) Running Costs

28,259 6,000 34,259

28,259 6,000 34,259

28,259 6,000 34,259

21,194 4,500 25,694

105,972 22,500 128,472

25,694

25,694

25,694

19,271

96,355

24,464 6,000 (25,694)

24,464 6,000 (25,694)

24,464 6,000 (25,694)

18,348 4,500 (19,271)

91,741 22,500 (96,354)

4,770

4,770

4,770

3,577

17,887

25,694 0 (783) (6,975)

25,694 0 (783) (6,975)

25,694 0 (783) (6,975)

19,271 0 (587) (5,231)

96,354 0 (2,935) (26,157)

After Tax Net Cost to Company

17,936

17,936

17,936

13,452

67,262

After Tax Net Cost

22,706

22,706

22,706

17,030

85,148

Maximum Reimbursement - Business Usage

75%

Cash Cost to Shareholder Employee Loan Repayments Running Costs Reimbursement Net Cost to Shareholder employee Cash Cost to Company Monthly Reimbursement GST Benefit on Interest & Depreciation GST Benefit on Running Costs Income Tax Benefit

75% 15% 15% 28%

9

Tax Operating Lease: E’ee Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Lease Cost Running Costs

25,959 6,000 31,959

25,959 6,000 31,959

25,959 6,000 31,959

19,470 4,500 23,970

97,348 22,500 119,848

23,970

23,970

23,970

17,977

89,886

25,959 6,000 (23,970)

25,959 6,000 (23,970)

25,959 6,000 (23,970)

19,470 4,500 (17,977)

97,348 22,500 (89,886)

7,990

7,990

7,990

5,992

29,962

23,970 (3,126) (5,836)

23,970 (3,126) (5,836)

23,970 (3,126) (5,836)

17,977 (2,345) (4,377)

89,886 (11,724) (21,885)

Net Cost to Company

15,007

15,007

15,007

11,255

56,276

Total Overall Cost

22,997

22,997

22,997

17,248

86,239

Maximum Reimbursement - Business Usage

75%

Cost to Shareholder Employee Lease Repayments Running Costs Reimbursement Net Cost to Shareholder employee Cost to Company Monthly Reimbursement GST Benefit on Lease & Running Costs Income Tax Benefit

15% 28%

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Tax Finance Lease: Coy+FBT Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Cash Cost to Company Monthly Repayments (P&I) GST Input on Purchase GST Output on sale

15% 15%

21,273 (13,500) 0

21,273 0 0

21,273 0 0

15,955 0 4,725

79,774 (13,500) 4,725

FBT GST on FB

20% 15%

10,196 2,700

10,196 2,700

10,196 2,700

7,647 2,025

38,233 10,125

Running Costs GST on Running Costs

15%

6,000 (783)

6,000 (783)

6,000 (783)

4,500 (587)

22,500 (2,935)

Income Tax on Depn Recovered

28%

0

0

0

3,465

3,465

Income Tax Benefit (depreciation, interest, running

28%

(12,476)

(12,115)

(11,720)

(8,509)

(44,820)

13,410

27,271

27,666

29,220

97,567

costs & FBT)

After Tax Net Cash Cost to Company

11

Tax Finance Lease: Coy≠FBT Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Cash cost to Shareholder Cash Cost to Company Monthly Repayments (P&I) GST Input on Purchase GST Output on sale FBT GST on FB Value of FB Charged to Shareholder Employee GST on Charge to Shareholder Employee

15% 15% 20% 15%

20,700

20,700

20,700

15,525

77,625

21,273 (13,500) 0

21,273 0 0

21,273 0 0

15,955 0 4,725

79,774 (13,500) 4,725

0 0 (20,700) 2,700

0 0 (20,700) 2,700

0 0 (20,700) 2,700

0 0 (15,525) 2,025

0 0 (77,625) 10,125

Running Costs GST on Running Costs

15%

6,000 (783)

6,000 (783)

6,000 (783)

4,500 (587)

22,500 (2,935)

Income Tax on Depn Recovered

28%

0

0

0

3,465

3,465

Income Tax Benefit (depreciation, interest, running

28%

(3,825)

(3,464)

(3,070)

(2,021)

(12,380)

After Tax Net Cash Cost to Company

(8,834)

5,026

5,421

12,537

14,150

Total After Tax Net Cash Cost

11,866

25,726

26,121

28,062

91,775

costs, FBT & recharge)

12

Tax Op Lease: Coy+FBT Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Cash Cost to Company Monthly lease payment GST Input monthly lease payments Income Tax Benefit on lease payments

15% 28%

25,959 (3,386) (6,321)

25,959 (3,386) (6,321)

25,959 (3,386) (6,321)

19,470 (2,540) (4,740)

97,348 (12,698) (23,702)

FBT GST on FBT Income Tax Benefit on FBT

20% 15% 28%

10,196 2,700 (3,611)

10,196 2,700 (3,611)

10,196 2,700 (3,611)

7,647 2,025 (2,708)

38,233 10,125 (13,540)

Running Costs GST on Running Costs Income Tax Benefit on Running Costs

15% 28%

6,000 (783) (1,461)

6,000 (783) (1,461)

6,000 (783) (1,461)

4,500 (587) (1,096)

22,500 (2,935) (5,478)

29,294

29,294

29,294

21,971

109,853

After Tax Net Cash Cost to Company

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Tax Op Lease: Coy≠FBT Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Cash cost to Shareholder

20,700

20,700

20,700

15,525

77,625

Cash Cost to Company Lease Payment GST Input Lease Payments Income Tax Benefit on Lease Payments

15% 28%

25,959 (3,386) (6,321)

25,959 (3,386) (6,321)

25,959 (3,386) (6,321)

19,470 (2,540) (4,740)

97,348 (12,698) (23,702)

FBT GST on FBT Income Tax Benefit on FBT

20% 15% 28%

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

Value of FB Charged to Shareholder Employee GST on Charge to Shareholder Employee Tax cost on recharge

28%

(20,700) 2,700 5,040

(20,700) 2,700 5,040

(20,700) 2,700 5,040

(15,525) 2,025 3,780

(77,625) 10,125 18,900

Running costs GST on Running Costs Income Tax Benefit on running costs

15% 28%

6,000 (783) (1,461)

6,000 (783) (1,461)

6,000 (783) (1,461)

4,500 (587) (1,096)

22,500 (2,935) (5,478)

7,049

7,049

7,049

5,287

26,435

27,749

27,749

27,749

20,812

104,060

After Tax Net Cash Cost to Company Total After Tax Net Cash Cost

14

Trust Owns, Op lease to E’ee & Reimbursement ex E’er No Interest Cost

15

Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Lease Cost Running Costs

25,959 6,000 31,959

25,959 6,000 31,959

25,959 6,000 31,959

19,470 4,500 23,970

97,348 22,500 119,848

Maximum Reimbursement - Business Usage

75%

23,970

23,970

23,970

17,977

89,886

Cash Cost to Trust Purchase/Sale Price GST Input on Purchase GST Output on sale

15% 15%

103,500 (13,500) 0

0 0 0

0 0 0

(36,225) 0 4,725

67,275 (13,500) 4,725

Lease Income GST Output

15%

(25,959) 3,386

(25,959) 3,386

(25,959) 3,386

(19,470) 2,540

(97,348) 12,698

Interest Income Tax on Depn Recovered Income Tax on Leasing Profit

33% 33%

0 0 1,212

0 0 1,212

0 0 1,212

0 4,084 909

0 4,084 4,546

68,639

(21,361)

(21,361)

(43,437)

(17,521)

25,959 6,000 (23,970)

25,959 6,000 (23,970)

25,959 6,000 (23,970)

19,470 4,500 (17,977)

97,348 22,500 (89,886)

7,990

7,990

7,990

5,992

29,962

23,970 (3,126) (5,836)

23,970 (3,126) (5,836)

23,970 (3,126) (5,836)

17,977 (2,345) (4,377)

89,886 (11,724) (21,885)

Net Cost to Company

15,007

15,007

15,007

11,255

56,276

Total Overall Cost

91,636

1,636

1,636

(26,189)

68,718

After Tax Cost of Trust Cost to Shareholder Employee Lease Repayments Running Costs Reimbursement Net Cost to Shareholder employee Cost to Company Monthly Reimbursement GST Benefit on Lease & Running Costs Income Tax Benefit

15% 28%

16

Coy Owned + FBT ≠ Interest Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Cash Cost to Company Purchase/Sale Price GST Input on Purchase GST Output on sale

15% 15%

103,500 (13,500) 0

0 0

0 0

(36,225) 0 4,725

67,275 (13,500) 4,725

FBT GST on FB

20% 15%

10,196 2,700

10,196 2,700

10,196 2,700

7,647 2,025

38,233 10,125

Running Costs GST on Running Costs

15%

6,000 (783)

6,000 (783)

6,000 (783)

4,500 (587)

22,500 (2,935)

Income Tax on Depn Recovered

28%

0

0

0

3,465

3,465

Income Tax Benefit (depreciation, interest, running

28%

(10,364)

(10,364)

(10,364)

(7,773)

(38,864)

97,749

7,749

7,749

(22,223)

91,025

After Tax Net Cash Cost to Company

17

Coy Owned ≠ FBT ≠ Interest Year 1

Year 2

Year 3

Year 4

Total

(9 m ths)

Cash cost to Shareholder Cash Cost to Company Purchase/Sale Price GST Input on Purchase GST Output on sale FBT GST on FB Value of FB Charged to Shareholder Employee GST on Charge to Shareholder Employee

15% 15% 20% 15%

20,700

20,700

20,700

15,525

77,625

103,500 (13,500) 0

0 0 0

0 0 0

(36,225) 0 4,725

67,275 (13,500) 4,725

0 0 (20,700) 2,700

0 0 (20,700) 2,700

0 0 (20,700) 2,700

0 0 (15,525) 2,025

0 0 (77,625) 10,125

Running Costs GST on Running Costs

15%

6,000 (783)

6,000 (783)

6,000 (783)

4,500 (587)

22,500 (2,935)

Income Tax on Depn Recovered

28%

0

0

0

(3,465)

(3,465)

Income Tax Benefit (depreciation, interest, running

28%

(1,713)

(1,713)

(1,713)

(1,285)

(6,423)

After Tax Net Cash Cost to Company

75,505

(14,495)

(14,495)

(45,837)

677

Total After Tax Net Cash Cost

96,205

6,205

6,205

(30,312)

78,302

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Summary Year 1

Year 2

Year 3

Year 4

Total

FINANCE LEASE/LOAN SCENARIOS Shareholder with tax free reimbursement

22,100

22,100

22,100

16,575

82,876

Company & paying FBT

13,410

27,271

27,666

29,220

97,567

Company with shareholder recharge so no FBT

11,866

25,726

26,121

28,062

91,775

Shareholder with tax free reimbursement

22,997

22,997

22,997

17,248

86,239

Company & paying FBT

29,294

29,294

29,294

21,971

109,853

Company with shareholder recharge so no FBT

27,749

27,749

27,749

20,812

104,060

Trust with operating lease to shareholder & tax free reimbursement

91,636

1,636

1,636

(26,189)

68,718

Company & paying FBT

97,749

7,749

7,749

(22,223)

91,025

Company with shareholder recharge so no FBT

96,205

6,205

6,205

(30,312)

78,302

TAX OPERATING LEASE SCENARIOS

ACQUISITION (ZERO INTEREST) SCENARIOS

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What if Analysis
What happens if vehicle value is $60,000?
What happens if vehicle value is $180,000?
What if business use is 25%?
What if business use is 95%?

Rules of Thumb?


Don’t pay FBT




Higher the value of the vehicle, the greater the FBT (or recharge) so more beneficial to use reimbursing method




Lower the value of the vehicle, the higher the business usage needs to be to favour reimbursing method




Ability to reduce FBT through private use restrictions significantly favour’s company ownership model

Other Issues


What if a lump sum upfront lease payment is made by a company in relation to a finance lease or operating lease & company reimburses – Finance lease: nothing – capital amount, simply treated as a deposit reduces interest on borrowings – Operating lease: amount treated as advanced rental, total rental payments spread evenly over term of the lease (sEJ 10)

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Other Issues


What if a lump sum upfront lease payment is made by an employee in relation to a finance lease or operating lease – Finance lease: nothing – simply treated as a deposit reduces interest on borrowings – Operating lease: amount is treated as deductible to company per sEA 3(7). No need to spread

Other Issues


What happens when vehicle is sold for more than GRV under an operating lease?




Company lease: amount received will be a claw back of deductible lease payments & treated as income (sCG 4 – recoveries via insurance, indemnity or otherwise)

Other Issues


Employee lease: amount received ≠ income of employee – Not employment related – Not a claw back of rental as no deductions ever claimed by employee – Nothing received by company so no tax liability – Risk = excessive reimbursement by company so portion of reimbursements not tax free

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22/09/2014

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CrediFlex – What We Do • Commercial Finance – – – –

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• Consumer Finance – Motor Vehicle Finance & Leasing. – Recreational Marine Finance. – Residential Property Finance.

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22/09/2014

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