A chattel mortgage is a type of commercial asset finance 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 full chattel mortgage repayment is not generally treated as one deduction. Depending on the business, asset and business-use percentage, eligible interest may be deductible, depreciation may apply and a GST credit may be available where the relevant requirements are met.
The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for eligible business vehicles and equipment. TAFS can structure the finance around the purchase price, deposit, term, repayments and balloon while your accountant confirms the tax treatment that applies to your business.
This guide explains how a chattel mortgage works, what may be tax deductible, how GST and depreciation are treated, and how it differs from hire purchase and rent-to-own.
A chattel mortgage is a business loan secured against the vehicle, machinery or equipment being purchased.
The word "chattel" refers to the asset.
Under a chattel mortgage:
TAFS primarily uses chattel mortgage finance for business asset purchases.
Chattel mortgages can be used for a broad range of income-producing assets.
This can include:
This can include:
This can include:
This can include:
TAFS arranges commercial asset finance across transport, earthmoving, agriculture and other business equipment categories.
The process is relatively straightforward.
The business decides what vehicle, machine or piece of equipment it needs.
You may purchase through:
The asset can be new or used, subject to lender requirements.
The amount financed can depend on:
For example:
Equipment purchase: $120,000
Deposit: $20,000
Amount financed: $100,000
Alternatively, an eligible applicant may be able to finance more of the purchase price.
The finance is repaid over an agreed period.
The available term can depend on:
The term should make sense against how long the business expects to use the equipment.
A balloon leaves an agreed amount outstanding at the end of the finance term.
This can reduce regular repayments.
However, it also means the business has a larger final payment.
The business owns the asset, while the lender registers a security interest over it.
The asset provides security for the finance.
The business makes the agreed repayments over the finance term.
Once the finance has been repaid, the lender removes its security interest.
The business owns the asset from settlement.
This is one of the defining features of a chattel mortgage.
For example, if a transport business buys a prime mover using a chattel mortgage:
This ownership position is important when comparing a chattel mortgage with structures where ownership remains with the finance provider during the agreement.
A chattel mortgage allows a business to purchase an income-producing asset without necessarily paying the entire purchase price in cash.
This can help preserve working capital.
Instead of putting a large amount of cash into a truck or machine upfront, the business can retain more money for:
The asset can then begin contributing to the business while being repaid.
Consider an earthmoving business purchasing a $150,000 excavator.
The business pays $150,000 upfront.
There are no finance repayments, but $150,000 leaves the business immediately.
The business finances the purchase and makes repayments over time.
It pays interest on the finance but retains more cash for business operations.
Neither option is automatically better.
The business needs to compare:
For many businesses, preserving working capital is an important reason to use business asset finance.
Parts of a chattel mortgage transaction may be deductible, but the entire repayment should not automatically be treated as one deduction.
A chattel mortgage involves several separate components:
Each may have different tax treatment.
TAFS can structure the finance, but your accountant should confirm what your business can claim.
Eligible interest may be deductible to the extent the finance relates to business use.
For example, if an excavator is purchased entirely for use in an earthmoving business, eligible interest on the finance may form part of the business's deductible expenses.
If an asset is partly used privately, your accountant may need to apportion the interest.
Factors that can affect the treatment include:
The principal component of the repayment is treated separately from the interest.
The principal component should not automatically be treated as an operating expense.
Principal is the amount borrowed to purchase the asset.
Each repayment reduces part of that outstanding amount.
The asset purchase itself is then considered under the applicable tax rules, including depreciation where relevant.
This is why businesses should keep their finance repayment schedule.
The schedule shows how the repayments are divided between principal and interest.
Some finance-related fees may have tax consequences, but the treatment can depend on the type of fee and the circumstances of the business.
Potential finance costs can include:
Do not assume every fee can be claimed immediately or in the same way.
Ask your accountant how each cost should be treated.
Potentially.
Because the business owns the asset under a chattel mortgage, eligible depreciation may be available on the business-use portion of the asset.
For example, this may apply to:
The depreciation method and amount can depend on:
TAFS does not determine depreciation treatment.
Your accountant should confirm how it applies to your business.
A GST-registered business may be able to claim an eligible GST credit on the business-use portion of the asset purchase where the requirements are met.
The seller and purchase structure matter.
For example, buying from a GST-registered equipment dealer may have a different GST outcome from buying from a private seller.
Factors to confirm include:
TAFS's existing guidance notes that a GST-registered business may be able to claim the eligible business-use portion of GST included in the asset purchase, subject to the transaction and required documentation.
Always confirm the actual GST position with your accountant before relying on an expected credit.
The GST position generally relates to the asset purchase rather than simply treating each principal repayment as a separate GST expense.
This is an important difference.
If you are planning your cash flow around an expected GST credit, speak with your accountant before finalising the purchase.
It can.
A private seller may not be registered for GST.
If there is no GST included in the purchase price, there may be no GST amount for the business to claim.
This is worth checking before comparing:
The cheapest advertised purchase price may not always have the same overall tax position.
A balloon is an agreed amount of principal that remains outstanding at the end of the finance term.
For example:
Amount financed: $100,000
Finance term: 5 years
Balloon: $20,000
Rather than paying down the complete $100,000 through regular repayments, $20,000 remains at the end.
This generally lowers the regular repayment.
At the end of the term, the business needs to manage the balloon.
This may involve:
A balloon payment generally represents loan principal rather than a separate operating expense.
It does not automatically create an additional tax deduction simply because it is paid at the end of the finance term.
A larger balloon may change the amount of interest paid over the finance term, but that is separate from the tax treatment of the balloon itself.
A balloon can be useful where the business wants to reduce regular repayments.
This may be particularly relevant for businesses with significant ongoing operating costs.
For example, a transport business may want to retain more cash each month for:
A civil contractor may need money available for:
Before selecting a balloon, consider:
The lowest regular repayment is not automatically the best finance structure.
Not automatically.
A deposit mainly changes how much money is financed.
For example:
Purchase price: $100,000
Deposit: $25,000
Finance amount: $75,000
The larger deposit can reduce:
But it also uses more business cash upfront.
The tax treatment of the asset should be considered separately.
A business should consider how much working capital it wants to retain after settlement.
Yes, subject to the transaction.
A trade-in can contribute toward the purchase of the replacement asset.
For example:
New truck: $180,000
Old truck trade-in: $60,000
Existing finance payout: $25,000
Potential remaining equity: $35,000
That equity may contribute toward the new purchase.
The existing finance generally needs to be paid out as part of the transaction.
The tax treatment of the trade-in should be discussed with your accountant.
Equipment financing simply refers to using commercial finance to purchase business equipment.
A chattel mortgage is one form of equipment financing.
It can be suitable where a business:
TAFS primarily arranges chattel mortgage finance for business equipment rather than rent-to-own or hire purchase structures.
Chattel mortgage and hire purchase are different structures.
The biggest difference is ownership.
With a chattel mortgage:
Under a traditional hire purchase arrangement:
The exact terms depend on the agreement.
TAFS primarily arranges chattel mortgage finance, so the hire purchase comparison is provided for educational purposes rather than as a TAFS product recommendation.
Rent-to-own also uses a different ownership structure.
The business owns the asset from settlement.
The provider generally owns the asset during the rental period, with ownership potentially transferring later under the terms of the agreement.
A business comparing the two should consider:
TAFS primarily arranges chattel mortgage finance rather than rent-to-own.
|
Feature |
Chattel Mortgage |
Hire Purchase |
Rent to Own |
|
Business owns asset from the beginning |
Yes |
Generally no |
Generally no |
|
Provider or lender has an interest in asset |
Lender holds security |
Provider generally owns during agreement |
Provider generally owns during rental period |
|
Regular payments |
Finance repayments |
Hire purchase payments |
Rental payments |
|
Ownership at end |
Business already owns asset |
Generally transfers under agreement |
May transfer under agreement |
|
Balloon potentially available |
Yes, depending on lender |
Depends on agreement |
Depends on arrangement |
|
Primary TAFS finance structure |
Yes |
No |
No |
The legal and tax treatment of individual agreements can vary.
Speak with your accountant before choosing a finance structure based on tax outcomes.
There is no universal answer for every business.
However, a chattel mortgage can be suitable where the business wants ownership from settlement.
Businesses comparing structures should consider:
TAFS focuses primarily on chattel mortgage finance for business asset purchases.
Again, it depends on what the business wants.
A chattel mortgage may suit a business that wants to:
Rent-to-own follows a different ownership model and should be assessed according to the specific agreement.
Under a chattel mortgage, the business owns the asset from settlement.
Under a typical equipment lease, the finance or leasing provider generally owns the asset and the business pays for the right to use it.
What happens at the end depends on the lease agreement.
TAFS primarily arranges chattel mortgage finance rather than equipment leasing.
Yes.
Sole traders can use chattel mortgage finance to purchase eligible business vehicles and equipment.
The lender may consider:
Where the asset has both personal and business use, the tax treatment may need to reflect the business-use percentage.
Speak with your accountant about recordkeeping.
Potentially.
Selected lenders will consider applications from newer businesses.
Where the business has limited trading history, the lender may consider:
The right lender depends on the complete application.
Potentially.
Selected lenders can assess eligible applications without requiring complete financial statements.
A low doc application may instead use:
Low doc does not mean no assessment.
The lender still needs to determine whether the business can manage the proposed repayment.
Yes.
Used vehicles and machinery can be financed through selected lenders.
The lender may consider:
Older assets may have:
The finance should suit both the business and the remaining working life of the equipment.
Potentially.
Selected lenders can finance privately purchased equipment.
Additional checks can include:
TAFS can coordinate these requirements between the buyer, seller and lender.
Yes, through selected lenders.
Pre-approval may also be available before bidding.
This can help the business understand:
Final approval will depend on the asset actually purchased.
The required documents depend on the business and lender.
For an initial assessment, you may need:
Additional information may include:
Once the asset has been selected, the lender may also need:
Repayments depend on several factors.
These include:
For example, changing the deposit changes the amount borrowed.
Changing the term changes how quickly the finance is repaid.
Adding a balloon can lower regular repayments but creates a larger final payment.
When comparing chattel mortgage options, look at the complete structure rather than just the monthly repayment.
Available terms depend on the lender, asset and business.
A lender may consider:
The term should generally make sense against how long the business expects to keep the asset.
For example, an older truck approaching replacement may not suit the same finance term as a brand-new machine expected to remain productive for many years.
It can.
This is one of the main reasons businesses finance assets rather than paying the entire purchase price upfront.
For example, if a business has $200,000 in cash and wants to buy a $150,000 machine:
The business is left with $50,000.
The business retains more cash but takes on finance repayments and interest.
That retained cash might be needed for:
The business should compare the cost of finance against the value of retaining that capital.
Before settlement, ask:
TAFS arranges the asset finance rather than providing tax advice.
When discussing the finance, ask:
TAFS primarily arranges chattel mortgage finance for eligible business vehicles and equipment.
The process generally works like this.
TAFS reviews the business, proposed asset purchase and available documentation.
TAFS starts with a soft credit check that leaves no mark on the applicant's credit file.
The TAFS internal credit team assesses the application against lender criteria.
TAFS has access to more than 80 bank and non-bank lenders.
The finance amount, deposit, term, repayments and balloon can be structured around the asset and business cash flow.
The application is submitted to the selected lender.
TAFS coordinates the lender requirements, finance documents and payment to the approved asset seller.
A chattel mortgage is business asset finance where the business owns the vehicle, machinery or equipment from settlement while the lender registers security over it until the finance has been repaid.
The chattel is the movable asset being financed.
Examples include a truck, excavator, tractor, ute or piece of commercial machinery.
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 includes principal and interest.
Eligible interest may be deductible, while the principal reduces the outstanding finance balance.
The asset itself is considered separately for depreciation and other applicable tax treatment.
Eligible interest may be deductible to the extent the borrowed funds are used for business purposes.
Speak with your accountant about the treatment that applies.
Some finance costs may have tax consequences, but different fees can be treated differently.
Your accountant should confirm how establishment and other finance costs should be recorded.
Potentially.
Under a chattel mortgage, the business owns the asset from settlement.
Eligible depreciation will depend on the asset, business use and applicable tax rules.
Potentially.
A GST-registered business may be able to claim the eligible business-use portion of GST included in the purchase where the relevant requirements are met.
The seller and transaction matter.
It depends on whether GST was actually included in the sale.
A private seller may not charge GST.
Confirm the position with your accountant before relying on an expected GST credit.
A balloon generally represents loan principal left until the end of the finance term.
It does not automatically create an additional deduction.
Not automatically.
A larger balloon changes the repayment structure and may affect total interest, but it does not by itself create a larger deduction.
The main difference is ownership.
Under 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 terms of the agreement.
With 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.
TAFS primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and business equipment.
The hire purchase and rent-to-own comparisons in this guide are provided to explain the differences between common equipment financing structures.
Yes.
Sole traders can apply for chattel mortgage finance for eligible business vehicles and equipment, subject to lender approval.
Potentially.
Selected lenders consider newer businesses based on factors such as industry experience, expected work, financial position, credit history and the asset being purchased.
Potentially.
Selected lenders can consider eligible low doc applications using bank statements and other business information instead of requiring complete financial statements in every case.
Yes.
Used commercial vehicles, machinery and equipment can be financed through selected lenders, subject to asset age, condition and value requirements.
Yes, through selected lenders.
Additional seller, ownership and asset checks may be required.
Yes.
Selected lenders finance auction purchases, and pre-approval may be available before bidding.
A chattel mortgage can be well suited to businesses that want to own an income-producing asset from settlement while spreading the purchase price over an agreed finance term.
Whether it is appropriate for your business depends on the asset, cash flow, finance cost and long-term plans.
No.
TAFS arranges commercial asset finance and can help structure the finance amount, deposit, term and balloon.
Your accountant should advise on GST, depreciation, tax deductibility and the correct treatment for your business.
A chattel mortgage can allow your business to purchase and own the truck, vehicle, machinery or equipment it needs while spreading the purchase cost over an agreed finance term.
TAFS can assess the business, asset 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.