Chattel Mortgage vs Finance Lease: Which Is Right for Your Business?
If you’re buying a vehicle or piece of equipment for your business in Australia, two finance structures come up more than any other: the chattel mortgage and the finance lease. Both can be tax-effective. Both give you access to the asset. But they work very differently — and choosing the wrong one can cost your business thousands in unnecessary tax or cash flow problems.
This guide gives you a plain-English breakdown of how each product works, who each suits, and how to decide which is right for your situation.
What Is a Chattel Mortgage?
A chattel mortgage is a business finance product where you own the asset from day one, and the lender takes a “mortgage” (security interest) over it until the loan is repaid. Once the loan is fully paid out, the mortgage is discharged and you own the asset outright — free and clear.
Key features:
- You are the legal owner of the vehicle or equipment from settlement
- The asset appears on your balance sheet as an asset (with the loan as a corresponding liability)
- You claim the full GST on the purchase price in your next BAS (upfront, not spread over the loan term)
- You claim depreciation each year (potentially instant asset write-off in year one)
- You claim the interest component of repayments as a tax deduction each year
- A balloon payment (residual) at the end of the term is optional — reduces monthly repayments
What Is a Finance Lease?
Under a finance lease, the lender (lessor) owns the asset and leases it to your business for a fixed term. You make regular lease payments and use the asset as if it were your own — but legally, it belongs to the lender until the end of the lease.
At the end of the term, you typically have three options:
- Purchase the asset for its agreed residual value
- Extend the lease (re-lease)
- Return the asset to the lender
Key features:
- The lender owns the asset during the lease term — it does not appear on your balance sheet in the same way (though accounting standards have changed under AASB 16)
- GST is charged on each lease payment, not the full purchase price upfront
- The entire lease payment (principal + interest component) may be tax deductible as a business expense
- You do not claim depreciation (the lender does, as they own the asset)
- A residual value is set at the start of the lease (this is the buyout price at the end)