Chattel mortgage vs finance lease vs hire purchase: which suits your business

If you are financing a vehicle, a machine, or any other asset for your business, the structure you choose matters as much as the rate. The three you will hear most often are the chattel mortgage, the finance lease, and commercial hire purchase. They can look almost identical on a repayment schedule, but they treat ownership, GST, and tax quite differently.

This guide breaks down each one in plain English, compares them side by side, and helps you work out which fits your business. For the tax specifics, always confirm with your accountant, because the rules and thresholds change.

The quick version

Here is each structure in a sentence:

• Chattel mortgage: you own the asset from day one, and the lender holds security over it until you pay it off.
• Finance lease: the lender owns the asset and leases it to you, with a residual to settle at the end if you want to keep it.
• Commercial hire purchase: the lender owns the asset while you pay it off in instalments, then ownership passes to you with the final payment.

Chattel mortgage

A chattel mortgage is the most common way Australian businesses finance vehicles and equipment. You buy and own the asset outright from day one. The lender advances the funds and registers a security interest over the asset on the PPSR until the loan is repaid.

• Ownership: yours from the start. The lender holds security only.
• GST: a GST-registered business can usually claim the full GST credit on the purchase price upfront in the next BAS, subject to the car GST limit for passenger vehicles. The repayments themselves do not attract GST.
• Tax: you claim depreciation on the asset and the interest portion of your repayments, to the extent the asset is used for business. It may also qualify for the instant asset write-off if it falls under the current threshold, which changes, so check with your accountant.
• Balloon: you can add a balloon, a lump sum at the end, to lower the monthly repayments.

It suits businesses that want to own the asset, claim depreciation, and get the GST credit sooner.

Finance lease

With a finance lease, the lender buys the asset and leases it to you for a fixed term. You use it and pay rentals while the lender keeps legal ownership throughout. At the end you usually pay a residual to take ownership, re-lease, or hand it back.

• Ownership: the lender, during the term.
• GST: GST is charged on each rental payment and claimed as you pay it, rather than upfront.
• Tax: the rental payments are generally deductible to the extent the asset earns income. You do not claim depreciation, because you do not own the asset.
• Residual: set in line with the ATO's minimum residual guidelines, so it stands as a genuine lease.

It suits businesses that prefer fully deductible rentals, want a lower upfront cost, and are comfortable not owning the asset during the term.

Commercial hire purchase

Hire purchase sits between the two. The lender owns the asset while you hire it and pay it off in instalments. You have use and possession the whole time, and ownership transfers to you automatically with the final payment.

• Ownership: the lender, until the last payment, then it is yours.
• GST: for agreements from 1 July 2012, the GST credit is claimable upfront, the same as a chattel mortgage.
• Tax: you claim depreciation and the interest component, much like a chattel mortgage.

Since that 2012 GST change removed its old advantage, hire purchase is far less common. Most brokers now point clients to a chattel mortgage unless there is a specific reason to use it.

Side by side

A note on the balance sheet

You may have heard that a lease keeps the asset off your balance sheet. Under the current accounting standard (AASB 16), that is largely no longer true for most businesses that prepare formal financial statements. Leases generally come onto the balance sheet as a right-of-use asset, with exemptions for short-term and low-value leases. If balance-sheet treatment matters to you, talk it through with your accountant.

So which one should you choose?

There is no single right answer. It comes down to whether you want to own the asset, your GST and tax position, and your cash flow. As a rough guide:

• Want to own the asset and claim depreciation, and you are GST registered? A chattel mortgage is usually the default.
• Prefer fully deductible rentals and a lower upfront commitment, and happy not to own during the term? A finance lease may fit.
• Set on eventual ownership with the lender holding title until the end? Hire purchase can work, though a chattel mortgage often reaches the same outcome more simply.

The honest answer is that the best structure depends on your numbers and your accountant's view of your tax position. This is where a broker earns their keep. We model the options against your situation, then take the chosen structure to a panel of more than 40 lenders to find the sharpest deal.

Want to see what repayments might look like? Try our finance calculator, or read how we work to see the process end to end.

This article is general information only and not financial, credit, or tax advice. Ventas Asset Lending is a finance broker, not a lender. Approvals are subject to lender assessment. Consider your own circumstances and speak to a qualified professional, including your accountant for any tax questions.