Can I Salary Sacrifice Chattel Mortgage Repayments?
The short answer is that no, you can't salary sacrifice payments towards a chattel mortgage. Here's why:
To understand why you won't need to salary sacrifice chattel mortgage payments, you need to understand the difference between a chattel mortgage and a novated lease or salary sacrifice car purchase agreement.
Chattel mortgages are loans for businesses
When you take out a chattel mortgage, the payments on the loan will be made directly from your business operating account, under the business name and ABN. A chattel mortgage requires that the vehicle is used primarily for the business, though a small amount of personal use is allowed.
This payment is totally separate from the wages or salary paid to any employees of the business, including the company directors and owners. This means that the car is owned by the business, though the owners or directors will be responsible for the payments if the business is unable to meet them.
| Case Study Part 1: Dave takes out a Chattel Mortgage |
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Dave has run his own building business for 20 years and took out a chattel mortgage for a new ute just two months ago. Due to a difficult time, he's started working for another company as an employee, and his business is now no longer active. Dave is still responsible for the chattel mortgage repayments, as the sole director of his company. He's currently making the payments from his PAYG income, but he's wondering how he can still claim tax benefits for the loan. |
So how is a chattel mortgage different from a salary sacrifice arrangement?
To find out the best solutions for Dave, we'll have a look at how salary sacrifice works, and whether there's a better way to pay out his existing chattel mortgage.
Novated leases are car loans for employees
A novated lease is a loan design for PAYG employees that allows them to make their car loan repayments from their pre-tax salary. The employee is responsible for the loan, not the business itself.
A salary sacrifice car loan is used to buy a car for your personal use. If you do use the car during your working day for business, you can claim tax deductions for the km you do as recorded in your log book or claim 66c/km for up to 5,000km with no logbook record.
When you apply for a novated lease agreement, your employer, the leasing company and you as the employee sign an agreement that the employer will make the payments from your pre-tax salary to the leasing company for the duration of your employment. When you leave the company, the lease is your responsibility.
What should Dave do?
Dave has a chattel mortgage belonging to a business that is no longer operating, and as the previous owner of the business, he's responsible for making sure that it gets paid.
Dave has a few options, such as selling any assets in the business to pay out the loan. However, he doesn't want to sell the ute as he's still using it to get to his new job.
Let's find out what happens:
| Case Study Part 2: Dave refinances his chattel mortgage to a novated lease |
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Dave is now a PAYG employee, but he's got a chattel mortgage from his closed business. He can't claim depreciation or GST on the car as the business that owns the car is no longer operating. Dave's new employer is understanding and keen to help him out. Dave calls a lending consultant to discuss some options. As the loan is still new, it's refinanced to a Novated Lease at no cost. This means that Dave will now make his car loan repayments through salary sacrifice, and he can benefit from paying less tax. |
This is a great outcome for Dave - he'll be able to keep the ute. Payments will be paid out of his pre-tax income by his employer, and he will benefit from a lower income tax bracket.
Can a business owner salary sacrifice a car?
As a company owner or director, if you pay yourself a wage or salary, you can salary sacrifice a car for your personal use. The salary sacrifice car loan payments will come out of your pay before tax is calculated, not from the business running costs account.
Ready to take out a car loan?
Now that you understand the differences between chattel mortgages and salary sacrifice arrangements, you know which option is right for your needs.
Tom Caesar is the Managing Director of The Positive Group, a group of Australian financial services companies offering a broad range of finance to clients Australia wide. The Positive Group assist clients in the areas of car finance, mortgages, insurance & wealth management. Tom has been in car & asset finance for over 10 years. Tom regularly contributes articles on car finance, insurance, technology and business growth, drawing on his experience of starting his own brokerage in 2009.