Chattel mortgage, finance lease or hire purchase: which one?

Three quotes for the same excavator, three different products, and the sales pitch for each one leads with the monthly payment. The payment is the least useful thing to compare.

What actually separates a chattel mortgage from a finance lease from a hire purchase is ownership — and ownership decides the tax treatment, the GST timing, what appears on your balance sheet, and what happens at the end. Those differences are worth more than a few basis points on the rate, in either direction.

Start with one question: who owns the asset?

Everything else follows from this.

Under a chattel mortgage, you own the asset from the moment you buy it. The lender advances the money and takes a mortgage over the goods as security, registered on the Personal Property Securities Register. It is a loan secured by the thing you bought — structurally the same idea as a mortgage over a building.

Under a finance lease, the financier owns the asset. As the ATO puts it, under a lease agreement the lessor “is the owner of the goods”, and the lessee “uses them for a specified time and, in return, makes a series of payments that can be fixed or flexible”. At the end there is a residual to deal with.

Under a hire purchase, you are buying by instalments but you do not own it yet. Again, the ATO’s own description: you “purchase goods through instalment payments”, “use the goods while paying for them”, and “do not own the goods until you have paid the final instalment”.

Once you know who owns it, the rest of the table writes itself.

The GST difference, which is the one people actually feel

This is where the products genuinely diverge in cash-flow terms, and it is worth being precise because the rules changed in 2012 and a lot of what is written about hire purchase online predates that.

Chattel mortgage. You are buying the asset outright with borrowed money, so the GST sits in the purchase price and a GST-registered business claims the credit in the normal way — in one go, on the activity statement for the period of the purchase. For a business buying a substantial piece of equipment, getting one-eleventh of the price back on the next BAS is a real and immediate cash-flow event.

Finance lease. You are not buying anything, so there is no lump of GST to reclaim. Instead, the ATO says you “treat each payment as though you are making a separate purchase each tax period”, and you claim a GST credit of one-eleventh of the lease instalments each period. The same total, spread across the term. And note the tail: at the end, “you may have to pay GST on residual payments” if you buy the goods, “which is treated as a separate transaction to the lease agreement”.

Hire purchase. For agreements entered into on or after 1 July 2012, the ATO’s position is that “all components of the supply made under the agreement are taxable, whether or not the credit component is separately disclosed”, and that associated fees and charges are also subject to GST. On the credit side, a business accounting on a cash basis “can claim input tax credits up front instead of waiting until each instalment is paid” — one-eleventh of all components, including the credit component.

Depreciation, and what not to assume about write-offs

If you own the asset — chattel mortgage or hire purchase — the asset is yours to depreciate, and the finance charge is a separate deductible expense. If you lease it, you are not the owner and you generally deduct the lease payments instead. That is the core of it.

The complication is the instant asset write-off, which is where most equipment finance conversations go and where most published advice ages badly.

The ATO’s description is stable: eligible businesses “can claim an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use”, it can be used for multiple assets provided the cost of each individual asset is less than the relevant limit, and it applies to both new and second-hand assets. A small business has to apply the simplified depreciation rules to use it.

What is not stable is the limit. It has been changed, extended, raised and allowed to lapse repeatedly, and it is set for an income year at a time. We are deliberately not printing a figure here, because a stale threshold on a finance website is worse than no threshold at all — it is the kind of number a reader will act on. Check the ATO’s current page and confirm it with your accountant for the year you are actually buying in.

Two points that do not change with the threshold:

• The deduction is about the asset, not the finance. Whether you paid cash or financed it does not change eligibility. What matters is ownership, cost and when it was first used or installed ready for use.
• A deduction is not a discount. It brings the timing of a deduction forward. It does not make the equipment cheaper, and it is never on its own a reason to buy something you did not need.

Assets that do not qualify, or businesses that are not eligible, fall back to the general depreciation rules and are written off over their effective life.

A novated lease is not a business facility

Worth separating out, because “lease” is doing double duty and the two are unrelated products.

A novated lease is an employee arrangement. The ATO describes car leasing as “commonly done through a novated lease in a salary sacrifice arrangement”, and the tax consequence follows: “if you lease a car for your employee’s private use, fringe benefits tax (FBT) applies”.

The structure is three-way — employer, employee and financier — and the employer takes on the lease obligations while the employee’s salary is reduced correspondingly. Whether the arrangement is treated as a car fringe benefit or something less favourable turns on whether it is a “bona fide lease”, which the ATO sets out as three conditions, including that all dealings are at arm’s length and on commercial terms and that the residual value is based on a reasonable estimate of market value rather than a reduced cost.

If you are a business buying a ute for the business, none of this applies to you. If you are an employer being asked to novate a lease for a staff member, all of it does, and it is a payroll and FBT question before it is a finance one.

New versus used, and terms by asset type

These are lending norms rather than published rules. No lender publishes its credit policy, so read them as what to expect and confirm the specifics for your asset.

• Used assets are financed, routinely. What changes is the term available, which is usually assessed against the asset’s age at the end of the term rather than at the start. A ten-year-old machine on a five-year term is a fifteen-year-old machine at the residual, and that is the number the credit team looks at.
• Term generally tracks useful life. Longer-lived plant supports longer terms; technology and light commercial vehicles typically get shorter ones.
• Private sales and auction purchases are harder, not impossible. Settlement mechanics, title checks and valuation all take longer than a dealer purchase, so start the finance before the hammer, not after.
• Specialised assets attract more scrutiny than generic ones. A financier’s real question is what the asset is worth to someone else if it comes back, so a common machine with a deep second-hand market is easier than a bespoke one.
• Balloon or residual amounts lower the payment and raise the total cost, and they concentrate the risk at the end of the term. Whether that is sensible depends entirely on whether you intend to keep the asset.

How to actually choose

A short version, in the order the decision usually resolves:

1. Do you want to own it at the end? Almost always yes for plant, machinery and work vehicles. That points at a chattel mortgage.
2. Is the GST timing worth something to you? A registered business making a large purchase gets the credit in one period under a chattel mortgage, and spread across the term under a lease.
3. Do you turn the asset over on a cycle? Fleets that are refreshed every few years are the case where a lease’s residual structure earns its keep.
4. Is there an accounting reason for the treatment? Rare in a small business, real in some larger ones. That is a conversation with your accountant, not your broker.
5. Only then compare cost — and compare it as total cost over the term, including fees and the residual, not as a monthly payment.

The rate is the last thing to look at, not the first. Two facilities with the same rate and different structures can differ by more, over the life of the asset, than any discount you would win by negotiating.

If you are weighing this up on a specific purchase, that is the conversation we have most days — see how we approach asset and equipment finance, or book a call and we will look at the quotes you already have.