A chattel mortgage is a common form of equipment finance used by Australian businesses to purchase vehicles, machinery and other business assets. The business owns the asset from settlement while the lender registers security over it until the finance has been repaid.
Hire purchase and rent-to-own work differently because ownership generally remains with the finance or rental provider during the agreement and transfers later, depending on the terms of the contract.
For an Australian business comparing equipment financing options, the main questions are when you own the asset, how repayments are structured, what happens at the end of the agreement and how the structure affects cash flow and tax treatment.
The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for commercial vehicles, machinery and business equipment. Hire purchase and rent-to-own are included in this guide for comparison so business owners can understand how the structures differ.
A chattel mortgage is a commercial loan used to purchase a business asset.
The "chattel" is the asset being financed, such as:
Under a chattel mortgage:
The important point is that the business owns the equipment from the beginning.
Consider a business purchasing a $150,000 excavator.
The business may decide to contribute a $20,000 deposit and finance the remaining $130,000.
The finance could then be structured around:
Equipment purchase price: $150,000
Deposit: $20,000
Amount financed: $130,000
Finance term: Agreed with the lender
Balloon: Optional, subject to lender criteria
Repayments: Structured according to the approved finance
The excavator belongs to the business from settlement.
The lender holds security over it while the loan remains outstanding.
Once the finance is repaid, the lender's security is removed.
A chattel mortgage allows a business to buy an income-producing asset without necessarily paying the full purchase price from cash upfront.
That can help preserve working capital for expenses such as:
The business pays interest for using finance, so the decision should balance the cost of borrowing against the value of keeping cash available inside the business.
The main difference is ownership.
With a chattel mortgage, the business purchases and owns the asset from settlement.
Under a traditional hire purchase agreement, the finance provider generally owns the asset during the agreement. The business uses the equipment and makes agreed payments, with ownership transferring according to the contract after the required payments have been completed.
The business:
The business generally:
The exact terms of a hire purchase agreement can vary.
TAFS focuses on chattel mortgage finance rather than hire purchase.
Rent-to-own uses another ownership structure.
Under a typical rent-to-own arrangement, the provider owns the asset during the rental period. The business makes payments for the use of the equipment, and ownership may transfer later if the conditions in the agreement are satisfied.
With a chattel mortgage, ownership starts immediately at settlement.
The business owns the equipment while repaying the finance.
The provider generally owns the equipment during the rental period, with the possibility of ownership transferring later.
That difference can be important for a business that knows it intends to own and keep the asset for the long term.
TAFS focuses on chattel mortgage finance. Rent-to-own is included here only to explain the difference between the structures.
|
Feature |
Chattel Mortgage |
Hire Purchase |
Rent to Own |
|
Business owns asset from settlement |
Yes |
Generally no |
Generally no |
|
Initial owner |
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 |
|
Lender/provider interest in asset |
Lender registers security |
Provider generally owns during agreement |
Provider generally owns during rental period |
|
Balloon may be available |
Yes, depending on lender |
Depends on agreement |
Depends on agreement |
|
Primary structure arranged by TAFS |
Yes |
No |
No |
The legal, accounting and tax treatment of each individual agreement can vary.
Speak with your accountant before choosing a finance structure based on tax outcomes.
Parts of a chattel mortgage transaction may be deductible, but the full repayment should not simply be treated as one tax deduction.
A chattel mortgage repayment normally contains:
The principal reduces the amount borrowed.
Eligible interest relating to business use may potentially be deductible.
Because the business owns the asset, depreciation may also apply under the relevant tax rules.
A GST-registered business may also be able to claim an eligible GST credit on the business-use portion of the purchase where the requirements are met.
Your accountant should confirm the treatment that applies to your business.
Eligible interest may potentially be deductible where the finance relates to an income-producing business asset.
For example, if a transport business finances a truck entirely for business use, the eligible interest component may form part of its business deductions.
This is separate from repayment of the principal.
Generally, no.
Consider a monthly repayment of $3,000.
That repayment does not automatically mean the business receives a $3,000 tax deduction.
Part of the payment may represent:
The principal reduces the outstanding debt.
Eligible interest may potentially be deductible.
The asset itself may be dealt with separately through depreciation or other applicable tax rules.
Potentially.
Because the business owns the asset, eligible depreciation may apply according to the tax rules relevant to that business and asset.
The finance term and depreciation treatment are separate.
For example, a truck might be financed over five years, but that does not mean its tax depreciation automatically follows the same five-year schedule.
Your accountant should calculate the appropriate treatment.
A GST-registered business may potentially claim an eligible GST credit on the business-use portion of the asset purchase where the normal requirements are satisfied.
The GST position can depend on factors such as:
For example, a dealer purchase may have a different GST position from equipment purchased from a private seller.
A balloon payment changes the finance structure.
It does not automatically create an additional tax deduction.
A balloon leaves an agreed amount of principal outstanding at the end of the finance term.
For example:
Amount financed: $150,000
Finance term: 5 years
Balloon: $30,000
The regular repayments are generally lower than they would be without the balloon because $30,000 remains outstanding at the end.
The balloon itself is not automatically an extra deduction simply because it is paid later.
Not automatically.
A larger balloon may reduce the regular repayment and can change the amount of interest paid over the finance term.
It does not by itself increase the depreciation available on the asset or create an additional deduction.
A balloon should be selected based on:
A deposit mainly changes how much money the business needs to borrow.
For example:
Equipment price: $120,000
Deposit: $20,000
Amount financed: $100,000
Increasing the deposit can reduce:
But it also means using more business cash upfront.
The tax treatment of the equipment itself should be considered separately from the amount borrowed.
There is no universal answer for every business.
The structures work differently.
A chattel mortgage may suit a business that wants to:
Hire purchase has a different ownership model because the provider generally owns the equipment during the agreement.
Businesses considering hire purchase should review the actual agreement and obtain accounting advice before making a decision based on tax treatment.
TAFS primarily arranges chattel mortgage finance.
It depends on what the business wants from the equipment.
For a business purchasing an asset it expects to keep, ownership from settlement can be an important consideration.
A chattel mortgage may suit a business that wants to:
Rent-to-own generally means the provider retains ownership during the rental period.
The business needs to check what happens at the end of the agreement and whether ownership transfers automatically or only after additional conditions are satisfied.
A chattel mortgage can be used for many types of commercial assets.
This can include:
This can include:
This can include:
This can include:
New and used assets may be financed subject to lender criteria.
Yes.
Selected lenders can provide chattel mortgage finance for used commercial vehicles, machinery and equipment.
The lender may consider:
An older asset may have a shorter available finance term than newer equipment.
Potentially.
Selected lenders can finance assets purchased from private sellers.
Additional checks may be required around:
The finance structure can still be a chattel mortgage.
Potentially.
Selected lenders can finance eligible assets purchased at auction.
It can be useful to have the finance position assessed before bidding so the business understands:
Final approval depends on the asset purchased.
Yes.
A sole trader can use chattel mortgage finance for eligible business vehicles and equipment, subject to lender approval.
The lender may assess:
Potentially.
Selected lenders can consider newer businesses.
Where the ABN has limited history, the lender may place more weight on:
There is no single minimum ABN age across every commercial asset finance lender.
Not always.
Deposit requirements depend on:
A deposit reduces the finance amount and can reduce regular repayments.
A business should also consider how much cash it needs to retain after settlement.
Yes.
Trade-in equity can potentially contribute toward the purchase.
For example:
Trade-in value: $60,000
Existing finance payout: $25,000
Potential equity: $35,000
That equity may contribute toward the replacement asset and reduce the amount that needs to be financed.
The available finance term depends on the:
The term should suit how long the business expects to use the equipment.
Financing an older asset over too long a period can leave the business making repayments when the equipment is approaching replacement.
TAFS primarily uses chattel mortgages when arranging finance for eligible business vehicles, machinery and equipment.
The process starts by understanding the business and the asset rather than immediately making a lender application.
TAFS reviews:
TAFS begins with a soft credit check that leaves no mark on the applicant's credit file.
The internal credit team assesses the application before deciding which lender criteria may suit it.
TAFS has access to more than 80 bank and non-bank lenders.
Different lenders can have different requirements around:
TAFS can review:
Once an option has been selected, the formal application is submitted to the chosen lender.
TAFS coordinates the remaining lender and seller requirements through to settlement.
Before choosing any equipment financing structure, ask:
The structure should support the business first.
Tax outcomes should then be confirmed with your accountant.
A chattel mortgage is a commercial loan used to purchase a business vehicle, machine or piece of equipment.
The business owns the asset from settlement while the lender registers security over it until the finance has been repaid.
The main difference is ownership.
With a chattel mortgage, the business owns the asset from settlement.
Under a traditional hire purchase agreement, the provider generally owns the equipment during the agreement and ownership transfers according to the contract once the required payments are completed.
With a chattel mortgage, the business owns the asset immediately.
With a typical rent-to-own arrangement, the provider generally owns the asset during the rental period and ownership may transfer later under the agreement.
Parts of the transaction may be deductible.
Eligible business-use interest may potentially be deductible, while the asset may be depreciated under the applicable tax rules.
The principal component of the loan repayment is treated separately.
Speak with your accountant about your circumstances.
Generally, no.
The repayment contains principal and interest.
The principal reduces the amount borrowed. Eligible interest may potentially be deductible.
A GST-registered business may potentially claim an eligible GST credit on the business-use portion of the asset purchase where the relevant requirements are met.
Potentially.
Because the business owns the asset, eligible depreciation may apply under the relevant tax rules.
A balloon generally represents principal remaining at the end of the finance term.
It does not automatically become an additional deduction because it is paid later.
It depends on the business and agreement.
For a business that wants ownership from settlement, a chattel mortgage provides that structure.
A chattel mortgage may suit businesses that want to own an asset immediately and keep it long term.
Rent-to-own follows a different ownership model.
TAFS focuses on chattel mortgage finance for eligible commercial vehicles, machinery and equipment.
Hire purchase and rent-to-own are discussed here for comparison rather than as TAFS finance products.
Yes.
Selected lenders can provide chattel mortgage finance for eligible used business vehicles, machinery and equipment.
Yes, subject to lender approval.
Potentially.
Selected lenders consider newer businesses based on the complete application, including industry experience, current work, credit history, available documentation and the asset being purchased.
The biggest difference between chattel mortgage, hire purchase and rent-to-own is when your business owns the asset.
TAFS primarily arranges chattel mortgage finance, allowing eligible businesses to own their vehicle, machinery or equipment from settlement while repaying the purchase over an agreed finance term.
TAFS can review the asset, purchase price, deposit, trade-in, finance term and balloon before comparing suitable options through access to more than 80 bank and non-bank 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.