Chattel Mortgage vs Finance Lease — Which Is Right for Your Business?

What Is a Chattel Mortgage?

A chattel mortgage is a loan secured against the asset being purchased. The business takes legal ownership of the asset from day one, and the lender holds a registered security interest over it until the loan is fully repaid. Because the business owns the asset, it can claim the GST on the purchase price upfront (for businesses that lodge BAS on a cash basis), and depreciate the asset over its effective life.

Interest on the loan is tax-deductible as a business expense. The asset and the corresponding loan both appear on the balance sheet.

Key features:

• Business owns the asset from settlement
• GST claimed upfront on the full purchase price
• Depreciation claimed annually over the asset's effective life
• Interest component of each repayment is tax-deductible
• Fixed repayments, with an optional balloon payment at the end
• Asset recorded on the balance sheet

What Is a Finance Lease?

With a finance lease, the lender owns the asset throughout the lease term and rents it to the business. The business makes regular lease payments and at the end of the term typically has three options: purchase the asset at a pre-agreed residual value, extend the lease, or return the asset. Because the business does not own the asset, it cannot claim depreciation. Instead, the full lease payment is deductible as an operating expense.

GST is spread across the payments rather than claimed upfront. Depending on how the lease is structured, the asset may or may not appear on the balance sheet.

Key features:

• Lender owns the asset during the term
• Full lease payment is tax-deductible as a business expense
• No upfront GST claim (GST is claimed per payment)
• No depreciation (you do not own the asset)
• Residual value or return option at end of term
• May allow asset to stay off the balance sheet

Key Differences at a Glance

Which Structure Is Right for You?

Chattel mortgage usually suits businesses that:

• Want to own the asset long-term
• Are registered for GST on a cash basis and want to claim GST upfront
• Have a taxable income that benefits from depreciation
• Are financing vehicles, trucks, trailers or heavy equipment

It is the most common structure used by Australian businesses for asset finance and works well for most owner-operators and SMEs.

Finance lease may suit businesses that:

• Need to keep assets off their balance sheet (for banking covenants or financial ratios)
• Prefer a simpler, fully deductible payment without splitting interest and depreciation
• Want flexibility to upgrade the asset at the end of the term
• Are GST-registered on an accruals basis (where upfront GST is less relevant)

A Note on Tax

The right structure from a tax perspective depends on your accounting method, tax position and how your accountant treats depreciation. The figures above are general in nature. Always confirm the best approach with your accountant before committing to a structure, particularly if your business has a complex ownership or trust structure.

What a broker can help with is finding the right lender and product for whichever structure your accountant recommends. Both chattel mortgage and finance lease products are available from our lender panel.