Chattel Mortgage vs Lease vs Hire Purchase (CHP)

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How to compare chattel mortgage vs lease vs hire purchase


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’ll be wanting 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.


Chattel Mortgage vs Lease vs Commercial Hire Purchase comparison

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

Chattel Mortgage Advantages


A chattel mortgage gives a business full ownership of the assets funded by a lender. A chattel mortgage will generally have low interest rates, as the assets obtained through a chattel mortgage 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.


Chattel Mortgage Positives and Negatives

Positives Negatives
  • Asset is recorded on your balance sheet
  • Claim the initial purchase-price GST up to $5,234 back on your next BAS
  • Claim depreciation on the vehicle in your tax return
  • All interest is tax deductible
  • Any residual balance (balloon) is not tax deductible
  • Accounting work involved in claiming GST and deductions
  • You can’t sell or dispose of the asset during the term

Chattel Mortgage GST Benefits


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.


Types of Lease available to Australian businesses


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:

  • Finance Lease - A mid-to-long-term lease used for high-value purchases - such as medical equipment, and your business will take on both the risks and benefits of owning the asset.
  • Operating Lease - A short-to-mid-term lease used for assets which may become quickly obsolete - such as computers and IT equipment - and the lender will take on both the risks and benefits of ownership.

Finance Lease Advantages


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.


Finance Lease Positives and Negatives


Positives Negatives
  • No deposit
  • Your equipment does not sit on your books as an asset or liability
  • Tax deductions for the lease payments
  • You won’t own the asset
  • Responsible for maintenance and running costs
  • Responsible for repairs and damage

Operating Lease Advantages


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.


Operating Lease Positives and Negatives


Positives Negatives
  • Can be more cost effective than paying cash for equipment with a short lifespan
  • Rental payments may be claimed as a tax deduction, which may be more tax effective than other forms of finance
  • The business can’t sell or modify the asset without the lessor’s permission
  • When the lease expires, the terms of that lease are void. The business may need to renegotiate the lease with the lender each time

Commercial Hire Purchase (CHP) Advantages


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.


Commercial Hire Purchase (CHP) Positives and Negatives

Positives Negatives
  • You will own the asset at the end of the term
  • GST is not charged on the monthly rental or residual payment
  • Tax deduction when the vehicle is used for business purposes
  • The lender can reclaim the asset if you don’t meet your payment obligations
  • Not suitable for assets with a short life span
  • You’ll pay more over time for the asset you are financing through hire purchase than if you bought it outright

Common businesses choosing chattel mortgage vs lease vs hire purchase


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

Chattel Mortgage vs Lease vs Hire Purchase (CHP) Summary


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:

  • How much your business will pay on finance in terms of interest and fees
  • If you will require ownership of the asset
  • If you need to upgrade the asset during the term of your finance agreement
  • The amount of GST or tax your business can claim
  • What you would like to happen to the equipment at the end of the finance term

Chattel Mortgage vs Lease vs Hire Purchase (CHP) FAQs


What are Chattel Mortgage GST benefits?


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).


What is the difference between a chattel mortgage, lease, and hire purchase?


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.


Where can I get a chattel mortgage, lease or hire purchase?


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.


How can I compare interest rates and asset types?


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. To understand how asset types and age affect interest rates, you can read our guide on how to compare equipment finance interest rates.