Commercial hire purchase vs novated lease - Case Study
For drivers with a large amount of business use for their vehicle, a commercial hire purchase, or CHP, is a common finance method.
CHPs and novated leases are similar in many ways, but the small ways in which they differ have a large effect on the eventual financial outcome.
In order to make a fair and balanced comparison, we’ll look at the optimal CHP strategy against the optimal novated lease strategy, based on the following salary and vehicle details.
Salary and vehicle |
|
|
Salary |
$65,000 + super |
|
Car allowance |
$18,000 |
|
Vehicle |
Mazda 6 Classic Sedan 5sp 2.5L |
|
Annual kilometres |
30,000kms p/a |
|
Usage |
85% business use |
We’ll structure the CHP to claim the maximum amount of interest against unclaimed principal. The term has been set for five years, however the exit strategy is to leave after three, allowing us to maximise the amount of depreciation claimable, while minimising the size of the balancing adjustment.
With the novated lease we have set the term for three years, and the strategy is to exit at the end of the term, before the vehicle reaches 100,000 kilometres. We have set an aggressive residual, which allows us to maximise the tax effectiveness and profit on disposal.
Finance structure
|
CHP |
DriverAutoPackage |
|
Term |
5 years |
3 years |
|
Interest rate |
9.5% |
9.5% |
|
Residual |
0% |
30% |
|
Exit strategy |
3 years |
3 years |
Taking these details, and playing them out over the three year lifecycle of the vehicle, we see a variation in the amount of tax that can be claimed back, depending on which finance method is being utilised.
These variations are displayed below, along with the resultant three year overall cost difference.
Tax deduction comparison |
||
|
Claimable items over three years |
CHP |
DriverAutoPackage |
|
Finance |
$7,954 tax deduction $0 tax deduction
|
$27,010 tax deduction |
|
Depreciation |
$13,971 tax deduction
|
$0 depreciation claimable |
|
Running costs |
$24,793 tax deduction
|
$23,578* tax deduction
|
|
GST |
$0 GST claimable |
$3,047 GST claimable |
*Gross running costs are $1,430 less than CHP due to fleet discounts
Net 3 year cost summary |
||
|
Mazda 6 |
CHP |
DriverAutoPackage |
|
Post-tax running costs |
$40,617 |
$39,988 |
|
Disposal cost |
- $2,779 |
- $9,238 |
|
Total 3 year cost |
$37,837 |
$30,750 |
As you can see, financing the Mazda with a novated lease ends up saving you $7,087 over the three year lifecycle of the vehicle.
Summary
Salary |
Vehicle |
Savings |
|
$65K |
Mazda 6 |
$7,087 |
All of the above costs include GST.