A chattel mortgage is a common form of business asset financing used by Australian businesses to purchase vehicles, machinery and equipment. The business owns the asset from settlement, while the lender registers a security interest over it until the finance has been repaid.
For tax purposes, the entire chattel mortgage repayment is not generally treated as one deduction. Depending on the business and how the asset is used, eligible interest may be deductible, depreciation may be available and a GST credit may be claimable where the relevant requirements are met. The principal component of the finance is treated separately.
The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and business equipment. Hire purchase and rent-to-own are covered in this guide so businesses can understand the differences, but they are not the main finance structures TAFS arranges.
This guide explains chattel mortgage tax deductibility, including how interest, GST, depreciation, finance fees and balloon payments may be treated, and how chattel mortgage differs from hire purchase and rent-to-own.
A chattel mortgage is a commercial loan used to purchase a business asset.
The "chattel" is the movable asset being financed. This could be a truck, ute, excavator, tractor, forklift or piece of commercial machinery.
Under a chattel mortgage:
TAFS primarily arranges chattel mortgage finance for commercial vehicles, machinery and other eligible business assets.
A chattel mortgage can be used for many income-producing business assets.
Common examples include trucks and commercial vehicles such as prime movers, rigid trucks, tippers, trailers, vans and utes. It can also be used for earthmoving machinery such as excavators, skid steers, posi-tracks and loaders, agricultural equipment such as tractors and harvesters, and manufacturing or commercial equipment such as forklifts and machinery.
Both new and used assets can potentially be financed.
Selected lenders can also consider dealer purchases, private sales and auction purchases.
Parts of a chattel mortgage transaction may be deductible, but it is important to separate the asset purchase from the finance used to pay for it.
A chattel mortgage repayment generally contains two main components:
Principal: The amount being repaid against the money originally borrowed.
Interest: The cost charged by the lender for providing the finance.
The principal component does not automatically become an expense deduction simply because it forms part of the monthly repayment.
Eligible business-use interest may be deductible, while the cost of the asset itself may be dealt with separately through depreciation or other applicable tax rules.
This means a business paying $3,000 per month on equipment finance should not assume it can claim a $3,000 deduction each month.
Your accountant should confirm the treatment that applies to your particular business and asset.
Eligible interest on a chattel mortgage may generally be deductible to the extent the borrowed money is used for business purposes.
For example, a transport business financing a prime mover that is used entirely for commercial work may potentially claim eligible interest associated with that finance.
Likewise, a civil contractor financing an excavator used to generate business income may potentially claim eligible interest.
Where an asset is partly used privately, only the eligible business-use portion may be claimable.
The treatment can depend on factors including:
TAFS arranges the finance, while your accountant should determine the deductible amount that applies to your circumstances.
Generally, the principal component of a chattel mortgage repayment should not simply be treated as a deductible operating expense.
Principal is the repayment of the amount originally borrowed.
For example, if a business borrows $100,000 to purchase machinery, repayments gradually reduce that $100,000 balance.
The asset purchased with the money is considered separately for tax purposes.
This distinction between principal and interest is one of the most important things to understand when looking at chattel mortgage tax deductibility.
Keep your finance repayment schedule so your accountant can identify the interest and principal components of the loan.
Potentially.
Because the business owns the asset under a chattel mortgage, eligible depreciation may be available subject to the tax rules that apply to the business and asset.
This may apply to business assets such as:
The amount and method of depreciation can depend on factors such as:
Depreciation is separate from the loan repayment itself.
Your accountant should confirm how the asset should be depreciated.
Potentially.
A GST-registered business may be able to claim an eligible GST credit for the business-use portion of GST included in the asset purchase where the relevant requirements are satisfied.
The important point is that GST relates to the purchase of the asset, not simply to each monthly principal repayment.
The GST position can depend on:
If you are relying on an expected GST credit when planning the purchase, confirm the amount with your accountant before settlement.
Private sales can have a different GST position.
A private seller may not be registered for GST. If GST was not included in the purchase price, there may be no GST amount available for the buyer to claim.
This is worth checking when comparing two pieces of equipment.
For example, a dealer might sell a machine for $110,000 including GST, while a private seller offers a similar machine for $100,000 without GST.
The advertised price alone does not tell you which transaction will provide the better overall result.
Consider the GST position, finance terms, equipment condition and total purchase cost together.
Some finance costs may have tax consequences, but different fees can be treated differently.
Potential costs can include:
Do not assume every finance fee is immediately deductible in full.
Ask your accountant how each particular cost should be recorded and claimed.
A balloon payment generally represents loan principal that remains outstanding at the end of the finance term.
It does not automatically create an extra tax deduction simply because it is paid as one larger amount at the end.
For example, a business might finance $100,000 over five years with a $20,000 balloon.
Instead of repaying the entire $100,000 through regular repayments, $20,000 remains payable at the end.
The balloon changes the finance structure.
It does not automatically change the underlying depreciation or create a separate $20,000 deduction.
A balloon is primarily a cash flow tool.
It can reduce regular repayments by leaving more of the principal outstanding until the end of the finance term.
This can be useful for businesses that want more cash available each month for operating expenses.
For a transport business, that could include:
For an earthmoving business, it could include fuel, wages, repairs, transport and project costs.
The trade-off is that the business has a larger final payment.
Before choosing a balloon, consider:
A balloon should be selected because it suits the business and asset, not because of an assumed tax benefit.
Not automatically.
A larger balloon changes how much principal is repaid during the finance term.
It can result in:
A larger balloon does not by itself create a larger tax deduction.
Ask TAFS about how the balloon changes the repayment and total finance structure.
Ask your accountant about the tax treatment.
A deposit mainly affects how much is borrowed.
For example:
Equipment price: $150,000
Deposit: $30,000
Finance amount: $120,000
A larger deposit can reduce the amount financed, regular repayments and total interest.
However, it also means more cash leaves the business at settlement.
The tax treatment of the asset should be considered separately from the size of the deposit.
Businesses should also think about how much working capital they need after the purchase.
Cash may still be required for wages, suppliers, fuel, insurance, repairs, registration, stock and tax obligations.
Not necessarily.
The tax treatment of the asset purchase depends on the rules applying to the business and asset at the time.
Some eligible businesses and assets may qualify for an immediate deduction under applicable tax concessions, while other assets may need to be depreciated over time.
Do not assume that financing an asset automatically makes the entire purchase price immediately deductible.
Your accountant should confirm:
Using finance does not automatically determine how the asset is depreciated.
The tax treatment of the asset and the way the purchase is funded are separate considerations.
A business may purchase an asset using:
The financing decision affects cash flow and interest costs.
Your accountant should separately determine how depreciation applies to the asset.
Chattel mortgage equipment financing allows the business to purchase an asset now and repay the purchase over an agreed finance term.
Rather than paying the complete purchase price upfront, the business can retain more working capital while the equipment begins contributing to operations.
For example, a civil contractor buying a $200,000 excavator may choose to finance the machine rather than removing $200,000 from available business cash.
That retained cash might then be available for:
The business pays interest for using the finance, so the decision should balance finance cost against the value of keeping capital available.
The main difference is ownership.
With a chattel mortgage, the business owns the asset from settlement.
Under a traditional hire purchase arrangement, the finance provider generally retains ownership during the agreement, with ownership transferring according to the agreement once the required payments have been completed.
The business owns the asset from the beginning.
The lender registers security over it while the finance remains outstanding.
The provider generally owns the asset during the agreement.
Ownership generally transfers later according to the terms of the hire purchase contract.
The different ownership structures can affect accounting and tax treatment.
TAFS primarily arranges chattel mortgage finance rather than hire purchase.
Rent-to-own also follows a different ownership structure.
Under a chattel mortgage, the business owns the equipment from settlement.
Under a typical rent-to-own arrangement, the provider generally retains ownership during the rental period, with ownership potentially transferring later if the conditions of the agreement are met.
For an equipment buyer, the key questions are:
TAFS does not position rent-to-own as its primary equipment finance product. Its main structure for eligible commercial asset purchases is a chattel mortgage.
|
Feature |
Chattel Mortgage |
Hire Purchase |
Rent to Own |
|
Business owns asset from settlement |
Yes |
Generally no |
Generally no |
|
Who generally owns asset initially? |
Business |
Finance provider |
Provider |
|
Regular payments |
Finance repayments |
Hire purchase payments |
Rental payments |
|
Ownership at end |
Business already owns asset |
Generally transfers under agreement |
May transfer under agreement |
|
Security over asset |
Lender registers security |
Depends on agreement |
Provider generally retains ownership |
|
Primary structure arranged by TAFS |
Yes |
No |
No |
The legal and tax treatment depends on the individual agreement.
The comparison is provided to help businesses understand how common equipment financing structures differ.
Neither structure is automatically better in every situation.
A chattel mortgage may suit a business that wants to:
Hire purchase has a different ownership structure.
Because TAFS primarily arranges chattel mortgages, businesses considering hire purchase should compare the specific agreement and speak with their accountant about the tax implications.
Again, it depends on what the business wants.
For a business that intends to purchase an asset and own it from settlement, a chattel mortgage can provide a straightforward ownership structure.
Rent-to-own may suit different circumstances because the provider generally retains ownership initially.
Compare the total commercial outcome rather than simply the monthly payment.
Yes.
Sole traders can apply for chattel mortgage finance for eligible business vehicles, machinery and equipment, subject to lender approval.
The lender may consider:
If the asset has both business and private use, the eligible tax claims may need to be apportioned.
Your accountant can advise on appropriate recordkeeping.
Potentially.
Selected lenders consider newer businesses based on factors including:
The fact that an ABN is new does not automatically mean the applicant has no relevant industry history.
For example, someone may register a new transport business after years working as a driver or subcontractor.
The lender can assess the complete application.
Potentially.
Selected lenders can assess eligible low doc applications using bank statements and other business information rather than requiring complete financial statements in every application.
Low doc does not mean no assessment.
The lender still needs to understand:
Yes.
Used commercial vehicles, machinery and equipment can be financed through selected lenders, subject to asset age, condition and value requirements.
A lender may look at:
Older equipment can sometimes result in a shorter available finance term.
Yes, through selected lenders.
Private-sale financing may require additional checks around:
The GST position should also be checked because a private seller may not charge GST.
Yes.
Selected lenders can finance auction purchases, and pre-approval may be available before bidding.
This can help the business understand its approximate finance position before making a purchase.
Final approval will still depend on the actual equipment bought.
Good recordkeeping makes it easier for your accountant to determine what can be claimed.
Keep records including:
Where an asset has both business and personal use, records supporting the business-use percentage can be particularly important.
Before completing an equipment purchase, ask your accountant:
When comparing chattel mortgage options, ask:
TAFS primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and equipment.
The process includes an initial assessment of the business and proposed asset purchase, followed by a soft credit check that leaves no mark on the applicant's credit file.
The TAFS internal credit team then assesses the application before a formal lender submission. TAFS has access to more than 80 bank and non-bank lenders and can structure the finance amount, deposit, term and balloon around the asset and business cash flow.
Once the business selects an option, the formal application is submitted to the selected lender and TAFS coordinates the remaining requirements through to settlement.
A chattel mortgage is business asset finance where the business owns the vehicle, machinery or equipment from settlement while the lender registers security over the asset until the finance is repaid.
Parts of the transaction may be deductible.
Eligible business-use interest may be deductible, and depreciation may be available on the asset.
The entire finance repayment should not automatically be treated as one deduction.
Generally, no.
The repayment contains principal and interest.
The eligible interest may be deductible, while the principal reduces the loan balance.
The asset is dealt with separately for depreciation or other applicable tax treatment.
Eligible interest may be deductible to the extent the borrowed funds are used for business purposes.
Your accountant should confirm how much your business can claim.
Potentially.
A GST-registered business may be able to claim the eligible business-use portion of GST included in the asset purchase where the relevant requirements are met.
Potentially.
Because the business owns the asset from settlement, eligible depreciation may apply according to the tax rules relevant to the business and asset.
Some finance-related fees may have tax consequences, but the treatment can differ by fee.
Your accountant should confirm how they should be recorded.
A balloon generally represents outstanding loan principal.
It does not create an additional deduction simply because it is paid at the end of the finance term.
Not automatically.
A larger balloon changes the finance structure and may affect interest costs, but it does not itself create a larger deduction.
The main difference is ownership.
Under a chattel mortgage, the business owns the asset from settlement.
Under traditional hire purchase, the provider generally retains ownership during the agreement, with ownership transferring according to the contract.
With a chattel mortgage, the business owns the asset from settlement.
Under typical rent-to-own arrangements, the provider generally retains ownership during the rental period and ownership may transfer later.
TAFS primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and equipment. The comparisons are included to explain the differences between common finance structures.
Yes.
Sole traders can apply for chattel mortgage finance for eligible business assets, subject to lender approval.
Potentially.
Selected lenders can consider newer businesses based on the complete application, including industry experience, financial position, credit history and the asset being purchased.
Yes.
Selected lenders can provide chattel mortgage finance for eligible used commercial vehicles and equipment.
Yes, through selected lenders.
Additional seller and asset checks may be required.
No.
TAFS arranges commercial asset finance and can help structure the finance amount, deposit, term and balloon.
Your accountant should advise on GST, depreciation, chattel mortgage tax deductibility and the tax treatment that applies to your business.
A chattel mortgage can allow a business to purchase and own an income-producing vehicle, machine or piece of equipment while spreading the purchase cost over an agreed finance term.
TAFS can assess your business, asset purchase and available documentation before comparing suitable chattel mortgage options through access to more than 80 lenders.
The Asset Finance Shop (TAFS) is a commercial asset finance brokerage based in Sydney.
Information on this page is general in nature and doesn't take your personal circumstances into account. Speak to a TAFS broker for options tailored to your business, and to your accountant regarding tax treatment.