When financing business assets in Australia — trucks, machinery, equipment or vehicles — two of the most common structures are chattel mortgage and finance lease. They achieve the same goal (getting the asset into your business) but work very differently when it comes to ownership, tax and accounting.
What Is a Chattel Mortgage?
A chattel mortgage is a loan secured against the asset being purchased. You own the asset from day one, while the lender holds a mortgage over it as security until the loan is repaid. Once the loan is paid out, the mortgage is discharged and you hold clear title to the asset.
Key features of chattel mortgage include: GST input tax credit on the purchase price claimed upfront, tax deductions on interest and depreciation, the asset appears on your balance sheet, and repayments are fixed for the loan term.
What Is a Finance Lease?
Under a finance lease, the lender purchases the asset and leases it to your business for an agreed term. You use the asset and make lease repayments, but the lender retains legal ownership throughout the lease term. At the end of the lease, you can purchase the asset at a residual value, extend the lease or return it.
Finance lease repayments are fully tax deductible as a business expense. There is typically no GST input tax credit on the purchase, but GST credits are available on each lease payment. The asset does not appear on your balance sheet, which can benefit businesses managing their debt-to-equity ratio. Finance leases can also be structured with seasonal repayments — useful for agricultural or construction businesses with irregular cash flow.
Other Finance Structures to Know
Beyond chattel mortgage and finance lease, there are two other structures worth understanding:
- Commercial hire purchase (CHP): Similar to chattel mortgage. The lender owns the asset during the term, but you take possession and make fixed repayments. Ownership transfers automatically at the final payment. The asset appears on your balance sheet.
- Rent-to-own: A flexible arrangement where you rent the asset with an option to purchase at the end of the term. Useful for businesses with adverse credit or who prefer operational flexibility. Repayments are fully deductible and can be structured to suit cash flow.
Key Differences at a Glance
- Ownership: Chattel mortgage — you own it from day one. Finance lease — lender owns it during the term.
- Balance sheet: Chattel mortgage — asset and liability on your books. Finance lease — off-balance-sheet treatment.
- Tax: Chattel mortgage — claim depreciation and interest. Finance lease — claim full lease repayments.
- GST: Chattel mortgage — claim full GST on purchase upfront. Finance lease — claim GST on repayments.
- End of term: Chattel mortgage — you own it outright. Finance lease — purchase at residual, extend or return.
- Seasonal repayments: Available under finance lease and rent-to-own — useful for businesses with seasonal cash flow.
Which Structure Is Right for You?
The best structure depends on your business's tax position, cash flow needs, and how long you intend to keep the asset. If you want ownership from the start and prefer to claim depreciation and GST upfront, chattel mortgage is usually the right choice. If you prefer to manage your balance sheet position, fully deduct repayments, or need seasonal payment flexibility, a finance lease may be better.
Always speak to your accountant before deciding on a finance structure. Our team at Overdrive Funding can explain the options and arrange the right structure for your business.