The short answer
A chattel mortgage, hire purchase and finance lease can all fund the same vehicle or machine with similar repayments, but they differ on ownership and tax. With a chattel mortgage, your business owns the asset from settlement, claims the GST on the price upfront and deducts depreciation and interest. With a hire purchase, the lender owns the asset until the final payment, but for agreements from 1 July 2012 the business can still claim the GST on the whole agreement upfront and is generally treated as the owner for income tax. With a finance lease, the lender owns the asset throughout, GST is claimed on each payment as you go, and the business generally deducts the lease payments while the lender claims depreciation (ATO). Most GST-registered businesses that want to keep the asset choose a chattel mortgage. A lease can suit those planning to replace the asset at the end of the term.
How do the three structures compare?
| Feature | Chattel mortgage | Hire purchase | Finance lease |
|---|---|---|---|
| Owner during the term | Your business | The lender | The lender |
| Owner at the end | Your business | Your business, after the final payment | Your business only if you pay the residual |
| GST on the price | Claimed upfront | Claimed upfront (agreements from July 2012) | Claimed on each payment |
| GST on interest or rentals | No GST on interest | Included and claimable | Included in each rental and claimable |
| Who claims depreciation | Your business | Generally your business | The lender |
| What your business deducts | Depreciation and interest | Depreciation and the interest component | Lease payments |
| End of term | Pay any balloon | Pay the final instalment or balloon | Pay, refinance or trade the residual |
| Most common for | Trade vehicles, trucks and machinery | Dealer and manufacturer finance, agriculture | Vehicles and equipment on a replacement cycle |
The tax treatment in this table is general. Your accountant applies the rules to your business, including the car limit and the special rules for leased cars above it.
How does GST timing differ in practice?
Take a $110,000 machine, including $10,000 GST, financed over five years by a business that's registered for GST:
- Chattel mortgage: the $10,000 GST credit is usually claimed on the BAS for the period of purchase. The interest carries no GST.
- Hire purchase from July 2012: the GST on the whole agreement, including GST on the credit charge, is claimed upfront in the period of the first payment.
- Finance lease: each monthly rental includes GST, and the credits are claimed bit by bit over the five years.
The upfront credit under a chattel mortgage or hire purchase can be a real cash flow boost in the quarter you buy.
Which suits a business that wants to keep the asset?
A chattel mortgage is the default choice for most GST-registered businesses planning to keep a vehicle or machine for its working life. You own it immediately, claim the GST upfront and have no residual to settle unless you choose a balloon. Hire purchase achieves a similar result and can be worth taking when a dealer or manufacturer offers a sharper rate on it.
When does a lease make more sense?
A finance lease can suit a business that replaces vehicles or equipment every few years, prefers rentals that are generally deductible as they're paid, or isn't registered for GST and so can't use an upfront credit. Remember that your business carries the residual risk on a finance lease. If you want to hand the asset back with no residual risk, look at an operating lease or rental instead.
Questions to take to your accountant
- Do we account for GST on a cash or non-cash basis, and how would an upfront credit affect our BAS?
- Is the asset a car subject to the car limit, or a vehicle designed to carry a tonne or more?
- Would the asset qualify for the instant asset write-off or the small business depreciation pool?
- Do we want the asset on our balance sheet, and does that affect any bank covenants?
- What happens at the end of the term: keep, sell or replace?
