Business equipment finance structures: which one suits you

When you finance equipment, the headline rate gets all the attention. The structure underneath it often matters more. It decides who owns the asset, when you claim the GST, and how you write it off at tax time.

This guide explains the five structures behind almost every business equipment deal in Australia, what each suits, and how to choose. Confirm the tax specifics with your accountant, because the rules and thresholds move.

The five structures at a glance

• Chattel mortgage: you own the asset, lender takes security. Depreciation and interest deductible. GST credit usually upfront.
• Finance lease: lender owns it, you lease it with a residual. Rentals deductible. GST on each rental.
• Commercial hire purchase: lender owns it until the last payment, then you do. Treated much like a chattel mortgage for tax.
• Operating lease: a true rental, lender keeps the residual risk, you hand the asset back.
• Equipment refinance / sale and leaseback: release cash from gear you already own.

Chattel mortgage

The most common structure for Australian businesses buying vehicles and equipment. You own the asset from day one and the lender registers security over it on the PPSR until you pay it off. A GST-registered business can usually claim the GST credit on the purchase price in the next BAS, and you claim depreciation plus the interest portion of repayments. You can add a balloon to lower the monthly repayment. It suits businesses that want to own the asset and bring the GST credit forward.

Finance lease

The lender buys the asset and leases it to you for a fixed term. You pay rentals and the lender keeps legal ownership, with a residual to settle at the end if you want to keep it. The rentals are generally deductible to the extent the asset earns income, and GST is charged on each rental rather than upfront. It suits businesses that want lower upfront cost and fully deductible payments without owning during the term.

Commercial hire purchase

A halfway house. The lender owns the asset while you pay it off in instalments, then ownership transfers to you with the final payment. For tax it works much like a chattel mortgage: you claim depreciation and the finance charge. Since GST changes in 2012 it lost its main advantage over a chattel mortgage, so fewer lenders push it now, but it still suits specific situations.

Operating lease

A genuine rental. You use the asset for a period and hand it back, and the lender carries the residual value risk. There is no obligation to buy. It suits assets that date quickly or that you like to rotate, such as IT and some vehicles. Note that under AASB 16 most leases now sit on the balance sheet for businesses that prepare formal financials, so the old off-balance-sheet rule of thumb no longer holds. Your accountant can tell you how it applies.

Equipment refinance and sale and leaseback

If you already own equipment outright, you can refinance it to free up working capital without losing the use of it. In a sale and leaseback you sell the asset to a financier and lease it straight back. It suits asset-rich, cash-tight businesses funding growth. There are tax and accounting consequences on the sale, so get your accountant involved early. We cover this in our guide to sale and leaseback.

Balloons and residuals

A balloon (on a chattel mortgage or hire purchase) or a residual (required on a lease) is a lump sum parked until the end of the term. It lowers your monthly repayment but leaves more to settle at the end, and you pay interest on that larger balance along the way. Match it to the asset's likely resale value so you are not left owing more than the asset is worth. More on this in our balloon payments guide.

How to choose

Ask three questions: do you want to own the asset, what is your GST and tax position, and how important is keeping the monthly cost low? Ownership and an upfront GST credit point to a chattel mortgage. Deductible rentals and lower upfront cost point to a lease. A broker can model the real cost of each against your numbers and take the winning structure to a panel of more than 40 lenders. For a side-by-side, see chattel mortgage vs finance lease vs hire purchase.

Authoritative sources

• AASB 16 Leases
• ATO ID 2002/1004: Car lease residual values

This is general information only and not financial, credit, or tax advice. Tax rules and thresholds change. Consider your own circumstances and speak to a professional. All finance is subject to lender assessment and approval.

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.