Many young professionals seek to upgrade their wheels when they start earning their first full-time income. Whilst a car is (more often than not) a depreciating, lifestyle asset as opposed to a wise investment, it is often necessary to get you from A to B or to help you do your day job.
For medical professionals, there are a few different options to consider with regard to how the car is purchased, let’s delve in to these and discuss the tax implications of each:
Buy it outright
If you’re a good saver, you might have the cash to pay for your new car outright. As opposed to the alternatives below, you won’t be paying any interest on the purchase so it should be easier on long-term cash flow.
Tax implications: you can still claim a tax deduction based on how much you use it for work using one of two ATO-approved methods; cents per kilometre or logbook. For further information, be sure to read our tax deductions article.
Get a car loan
If you don’t have access to all of the cash required for your vehicle purchase, any shortfall can potentially be financed. You have two finance options for getting a car loan:
- Hire Purchase: you pay to ‘hire’, or rent, the car over the lease with the option of buying it at the end. The lender is the legal owner of the car.
- Chattel Mortgage: you borrow money to buy the car from the lender. Under this option you are the legal owner of the vehicle but have a mortgage over the car.
A car loan can be facilitated through your bank, via the car dealership or through a finance broker. When considering finance, it pays to thoroughly research your options. Dealerships have the benefit of being a one-stop-shop where you can not only purchase the car but also arrange a loan through their finance arm. Convenience aside, an “apples for apples” comparison should always be considered. For example, when comparing a 0% (or close to 0%) finance deal, consider whether the“interest-saving” has already been factored in to the sale price.
Similarly, hire purchase quotes tend to focus on the interest rate but not the monthly repayments. It’s important to take both of these elements into consideration when comparing your options to highlight any “hidden” fees and charges. For example, if one provider quotes a 5.5%pa rate with a $800 application fee, $5 monthly service fee and $300 termination fee, their effective comparison rate would be a lot higher than another provider that has a 5.6% rate with lower or no fees.
Rates will also vary depending on whether you’re buying new versus second hand and there is often a balloon or residual amount to be paid back at the end of the loan term. Given the loan is secured against the car, the rates are generally lower than say a personal (unsecured) loan. Terms are usually one to seven years with longer options meaning lower monthly repayments.
If you’re using the logbook method for claiming a tax deduction, the interest on the lease and borrowing costs are deductible, to the extent of the logbook percentage.
Obtain a novated lease
If you work in a public hospital, you can usually obtain a novated lease via your packaging company. The beauty of the novated lease is that the amount you are packaging actually falls outside the two living expenses and meal entertainment caps.
Essentially, the hospital is leasing the car on your behalf in your name. You make the lease repayments with both pre-tax and post-tax income each fortnight which provides a tax saving. The added bonus is that, given the hospital is a GST-registered Australian business, they claim all of the GST credits on the costs (including purchase) so that you don’t have to pay it! Usually, a hospital employee will be provided with a special debit card which they use to fund all motor vehicle expenses including fuel, registration, insurance, servicing etc.
At the end of your lease period, you have the option to lease a new car, re-finance the residual amount or purchase the car outright by paying the residual.
Tax implication: critically, with a car on a novated lease, you cannot claim any additional tax deduction in your income tax return. This would be double-dipping as you are already deriving a tax benefit from the vehicle.
Factor in your investment plans
It’s also important to consider what other financial goals you have for the next three – five years. If you are hoping to enter the property market in the near future, this should be factored in to your decision around what car to buy, how much to spend and how to finance it. Purchasing a new car outright will obviously erode some of your savings that could have been used towards your 10% house deposit, potentially pushing back your timeline. Likewise, financing a car over a five – seven year period may inhibit your borrowing capacity when it comes time to purchase your first home. Forward thinking and careful planning can help you weigh up these decisions and ensure you make the right call for your personal situation.
If you’re confused about which option is right for you and your overall tax position, or would like help comparing the finance options available, reach out to a DPM consultant today.
* The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.