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Choosing between a chattel mortgage, lease, or hire purchase will depend on the type of business you operate, your financial circumstances (such as whether you need access to cash flow), your tax position (for chattel mortgage GST benefits) and the type of the asset you wish to purchase. You’ll also want to consider:
Shopping around for the right loan can save you thousands of dollars in interest and fees.
A chattel mortgage, finance or operating lease, and commercial hire purchase (CHP) are all forms of equipment finance available to businesses in Australia. Each type of equipment finance offers different levels of asset ownership and business tax benefits. For example, there are chattel mortgage GST benefits, and business tax deductions on lease payments.
If you want to compare a chattel mortgage with a lease and commercial hire purchase, the first consideration is what kind of asset or assets you want to acquire for your business. You can finance vehicles, equipment, or machinery for a business through these types of commercial finance, but understanding how they work will help you decide which will benefit you and your business the most.
|Type of finance||Common use||Asset value||Asset lifespan||Asset ownership|
|Chattel Mortgage||Vehicles Machinery||High||Long-term||Full ownership|
|Finance Lease||Large machinery Medical Equipment||High||Long-term||Ownership benefits|
|Operating Lease||IT equipment Telco equipment||Low||Short-term||Part ownership|
|Commercial Hire Purchase||Tools Equipment Vehicles||Medium||Medium-term||No ownership|
A chattel mortgage gives a business full ownership of the assets funded by a lender. Generally, chattel mortgage interest rates will be competitive as the assets you purchase will always act as security on the loan itself. A business can also claim the initial GST amount of the asset’s purchase price when using a chattel mortgage.
Once a chattel mortgage is established through a lender, a business can claim the GST on the initial purchase price of the vehicle as an input tax credit on its next Business Activity Statement (BAS). To do so, your business will need to be registered for GST on a cash basis — i.e. your business records income and expenses when they occur.
The maximum amount of GST you can claim on an asset is 1/11th of the cost limit set each year by Australian Tax Office. The cost limit includes both GST and depreciation, and for 2019 is set at $57,581. This means the maximum amount of GST you can currently claim on a vehicle is $5,234.
To learn more about how chattel mortgage GST benefits work, you can read our dedicated Chattel Mortgage guide.
MONEY TIP: A balloon payment on a chattel mortgage can help reduce the agreed repayment amount, freeing up business cash flow.
There are two main types of business lease in Australia: a finance lease, and an operating lease. To decide which type of lease may best suit your business needs, it’s important to understand the distinctions between the two and what they are commonly used for:
The main advantage of a finance lease is low interest rates in comparison to other types of equipment finance. Your business will have both the use of business equipment and the benefits of ownership, while the lender will have actual ownership of the asset, which means there is very low risk to the lender. You may also be able to claim tax on your finance lease payments.
The main benefit of an operating lease is that your business can commonly upgrade the assets purchased within the lease period. This is highly beneficial for businesses purchasing IT equipment, as these types of assets often become obsolete within a few years. Your business can also claim tax on your rental payments.
The main benefit of a commercial hire purchase is that your business will own the asset at the end of your agreement. Your business will benefit from not needing to purchase the asset outright, which frees up cash flow on medium-value assets such as office furniture or power tools. For this reason, hospitality businesses often use hire purchase agreements to finance commercial kitchen equipment.
|Industry||Chattel Mortgage||Finance Lease||Operating lease||Hire Purchase|
|Hospitality — Restaurants and Cafes||Fit-outs Company Cars||Brewery equipment||IT and Payment Systems||Commercial kitchen equipment|
|Construction and Mining||High-value equipment||High-value equipment||Low-value equipment||Mid-value equipment|
|Medical||Fit-outs Company Cars||Medical Equipment||IT and Payment Systems||Office furniture|
|Retail||Fit-outs Company Cars||Not often used||IT and Payment Systems||Store furniture|
|Tradespeople||Vehicles||High-value tools||Low-value tools||Mid-value Tools|
|Manufacturing||Manufacturing equipment||Manufacturing equipment||Not often used||Not often used|
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The GST benefits of a chattel mortgage are available to businesses registered for GST and operating on a cash basis. A cash basis means your business records expenses and income as they occur — this allows you to claim back the initial purchase-price GST on your next business activity statement (BAS).
The differences between a chattel mortgage, lease, and a hire purchase agreement are levels of asset ownership for the business and varying degrees of tax benefits. While all of these types of business finance are used to purchase equipment, vehicles, and machinery, understanding their differences could save you money and provide access to vital business cash flow.
A chattel mortgage, lease, and hire purchase are all available from a variety of lenders in Australia — including banks, non-bank lenders, and specialist asset finance lenders. You can read about where to apply and how to qualify in our equipment finance guide.
Interest rates on a chattel mortgage, lease, and hire purchase will vary depending on the type of finance you choose and the specific asset or assets you wish to purchase.