The short answer
A chattel mortgage is a business loan used to buy a vehicle or piece of equipment, where the business owns the asset from settlement and the lender takes a security interest over it until the loan is repaid. Chattel means movable property, as opposed to land. The lender registers its interest on the Personal Property Securities Register, and the registration is removed when the loan is paid out. For a GST-registered business with a tax invoice, the GST in the purchase price can usually be claimed as a GST credit in the BAS for the period of purchase (ATO). Interest on the loan is a financial supply, so it carries no GST. The business can generally claim depreciation and the interest, to the extent the asset is used for business. Terms usually run from one to seven years, with an optional balloon at the end to lower repayments.
How does a chattel mortgage work?
- You choose the vehicle or equipment, new or used, from a dealer or a private seller.
- The lender approves the loan, pays the seller and registers a security interest on the PPSR.
- Ownership passes to your business at settlement.
- You make fixed repayments over the term, plus any balloon at the end.
- When the loan is repaid, the lender removes its PPSR registration and you hold the asset free of finance.
How does GST work on a chattel mortgage?
Because the business buys the asset outright on day one, GST is handled as for any purchase. If you're registered for GST, use the asset for business and hold a tax invoice, you can usually claim the GST as a credit on the BAS for that period. On a $110,000 machine including GST, that's a $10,000 credit. The interest charged on the loan is input taxed, so there's no GST on it and nothing to claim.
Many lenders finance the full GST-inclusive price, and the business uses the GST refund as working capital or to reduce the loan. Ask your accountant whether your BAS cycle makes the timing work for you.
What can you claim at tax time?
- Depreciation on the asset, based on its effective life, or an immediate deduction if it qualifies for the instant asset write-off, currently $20,000 per asset for businesses with aggregated turnover under $10 million.
- Interest on the loan, to the extent the asset is used for business.
- Running costs such as fuel, insurance and maintenance, again for the business portion.
Cars are subject to the car limit on depreciation, while vehicles designed to carry a tonne or more generally aren't. Your accountant applies these rules to your situation.
How does a balloon change the repayments?
Using an assumed 8.5% rate on $110,000 over five years, repayments are about $2,257 a month with no balloon and about $1,961 a month with a 20% ($22,000) balloon. Total interest rises from around $25,400 to around $29,700, because more of the loan stays outstanding. A balloon suits assets that hold their value and businesses with a plan for the final payment.
Example only. It isn't a real client, and the rate is an assumption for illustration. Your rate depends on the lender, the asset and your business. Run your own numbers in the repayment calculator.
What are the pros and cons?
| Advantages | Things to weigh up |
|---|---|
| Ownership from day one, so the asset is on your balance sheet | The asset is security, and the lender can repossess it if you default |
| GST credit on the purchase price, usually in the next BAS | Early payout can involve fees or most of the remaining interest |
| Fixed repayments make budgeting simple | A balloon has to be paid, refinanced or covered by a sale |
| Available for new and used assets, including private sales | Ownership means you carry the risk of the asset losing value |
