Finance Lease vs Chattel Mortgage For Businesses

In Australia when businesses want to buy a car for business use via a loan they usually think about “business finance lease” or “business chattel mortgage”. These two loan products have different features in their structure, ownership, tax treatment, and other aspects. Let's compare:

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Business Finance Lease:

1. Ownership: In a finance lease, the bank (financier/lender) owns the vehicle during the whole lease term. The business just pays regular lease payments for the use of the car.
2. End of Lease: At the end of the lease term, the business usually has the option to either purchase the vehicle at an agreed-upon residual value or return the car to the financier. If the business chooses to purchase the vehicle, they may pay the residual value or refinance it.
3. Tax Treatment: Lease payments are generally considered an operating expense and may be tax-deductible for the business if it meets the ATO requirements.
4. GST Treatment: The GST (Goods and Services Tax) on the vehicle is typically included in the lease payments.
5. Flexibility: Finance leases offer flexibility in terms of lease duration and end-of-lease options.

Business Chattel Mortgage:

1. Ownership: In a chattel mortgage, the business takes ownership of the vehicle from the start of the loan agreement, and the financier takes a mortgage over the car as security for the loan. (You own the car but the bank/lender will have their interest registered via PPSR, Personal Property Securities Register (PPSR) is a website maintained by government )
2. End of Loan Term: Once the loan, including any interest and fees, is repaid in full, the mortgage is removed on PPSR, and the business gains full ownership of the vehicle.
3. Tax Treatment: The interest charges on the chattel mortgage and the depreciation of the vehicle may be tax-deductible for the business.
4. GST Treatment: The GST on the vehicle is generally payable upfront at the time of purchase, and the business can claim a GST credit for the GST included in the purchase price.
5. Flexibility: Chattel mortgages offer flexibility in loan terms and may allow businesses to structure repayments to suit their cash flow.

It's essential for businesses to carefully consider their financial situation, cash flow, and long-term needs before choosing between a business finance lease and a business chattel mortgage. Again, it's crucial to consult a tax advisor for specific tax advice and high recommend using a finance broker to organise your loan so that it meets your specific business requirements.