The short version
- A chattel mortgage makes the business the owner of the asset from day one. The lender registers a security interest on the PPSR and removes it when the loan is paid off. The business claims the GST upfront, depreciates the asset and deducts the interest.
- An operating lease keeps the asset on the lender's books. The business pays rent for the term, deducts the rent, claims GST on each payment and hands the asset back at the end.
- Tax treatment usually decides it. A chattel mortgage suits a business that wants to own the asset and claim depreciation. An operating lease suits a business that wants to upgrade on a cycle and keep the cost as a simple operating expense.
- Neither is always cheaper. A chattel mortgage usually costs less in total if you keep the asset to the end of its working life. An operating lease can be easier on monthly cashflow and takes away the residual-value risk (the risk the asset is worth less than expected at the end).
Most asset finance decisions in Australia come down to two structures: the chattel mortgage and the lease. The chattel mortgage is the default and makes up most of the business asset finance written in the country. For some assets and some businesses, though, a lease is the better fit, and an operating lease in particular changes your tax and balance sheet position. Both sit inside the wider asset finance category, alongside hire purchase and the finance lease. Below we cover what each structure is, how they compare line by line, and how GST, depreciation and balance sheet treatment work for each. The right answer depends on the deal. No structure suits every business.
What is a chattel mortgage?
A chattel mortgage is a loan where the business owns the asset from day one and the lender registers a security interest over it on the Personal Property Securities Register (PPSR) until the loan is repaid.
It works like this. The lender pays the supplier in full at settlement. The business takes delivery and owns the asset outright, subject to the lender's registered security. It repays the loan in monthly instalments over one to seven years, and the lender's interest is removed with the final payment. If the business defaults, the lender can repossess and sell the asset to recover the debt.
Most Australian businesses choose it for the tax position. Because the business owns the asset from settlement, a GST-registered business using it for business claims the full GST credit on the purchase price on its next Business Activity Statement (BAS), in one go rather than spread across the term. On a $110K vehicle, that is roughly $10K of GST back in one BAS cycle. The business also claims depreciation under Division 40 of the income tax law, and the interest part of each repayment is deductible.
Chattel mortgages commonly run one to five years on vehicles and longer on heavy plant. A balloon payment at the end is normal, typically 20 to 40% of the amount financed. The structure suits a business that plans to keep the asset, wants the depreciation deduction and wants the GST back upfront.
What is an operating lease?
An operating lease is a rental. The lender owns the asset, the business pays to use it over a fixed term, and the asset goes back to the lender at the end with no obligation to buy it.
The lender carries the residual-value risk, because it has to sell the asset when it comes back. That risk is priced into the rent, which is why an operating lease usually costs more than a chattel mortgage on the same asset. In return, the business never has to resell a worn asset, and the cost sits in the accounts as a simple operating expense.
The tax works the other way to a chattel mortgage. The business does not own the asset, so it claims no depreciation. Instead the full rent is deductible as an operating expense, to the extent the asset is used for business. GST is charged on each rental payment and the business claims it back payment by payment, not in one hit upfront.
Operating leases run two to five years and suit assets that date quickly: IT hardware, diagnostic and imaging equipment, some commercial vehicles. They suit a business that would rather refresh on a cycle than own, depreciate and resell. Some businesses also use them to keep the cost off the balance sheet, subject to the accounting standard covered below.
Chattel mortgage vs operating lease: side by side
| Category | Chattel mortgage | Operating lease |
|---|---|---|
| Ownership | Business owns from day one; lender holds a PPSR security interest | Lender owns throughout; asset returned at end of term |
| GST | Claimed upfront on the purchase price, on the next BAS | Claimed on each rental payment as it falls due |
| Depreciation | Business claims it under Division 40 | None, as the business does not own the asset |
| What is deductible | Interest part of repayments, plus depreciation | The full rent, as an operating expense |
| Balance sheet | Asset and matching liability sit on the books | Right-of-use asset and lease liability if AASB 16 applies; otherwise off balance sheet |
| Typical term | 1 to 7 years, balloon payment common | 2 to 5 years, no residual payable by the business |
| End of term | Business already owns the asset outright | Asset handed back; re-lease, extend or walk away |
| Best suited to | Keeping the asset, claiming depreciation, GST back upfront | Regular upgrades, simple operating expense, no residual risk |
How the tax treatment works
This section decides most deals, and most comparison pages skip over it. Three things differ between the two structures: when you claim GST, whether you depreciate, and how the asset shows on your balance sheet.
GST
Under a chattel mortgage the business owns the goods from settlement, so a GST-registered business claims the full GST credit on the purchase price on the BAS for the period it bought the asset. The finance itself has no GST, because interest on a loan is an input-taxed financial supply, not a taxable one.
Under an operating lease, GST applies to each rental payment. The business claims the credit on each payment as it falls due, across the life of the lease. For a GST-registered business the total credit is about the same either way. The difference is timing. On a large asset, the upfront credit under a chattel mortgage can mean a decent BAS refund in the first quarter after purchase.
One catch on vehicles. If the asset is a car as the ATO defines it, the GST credit is capped at one-eleventh of the car limit, and depreciation is capped at the car limit too. The car limit is indexed each year, so check the current figure with the ATO before relying on it for a deal.
Depreciation
Where the business owns the asset, as with a chattel mortgage, it claims depreciation under Division 40 over the effective life the ATO sets for that type of asset. Small businesses under the turnover threshold may be able to write the asset off straight away under the instant asset write-off instead. That threshold has changed many times in recent budgets, so confirm the current limit before counting on it.
Where the lender owns the asset, as with an operating lease, the business claims no depreciation. The deduction comes through the rent instead. A chattel mortgage puts more of the deduction up front through depreciation and any instant write-off. An operating lease spreads it evenly across the rental payments.
Balance sheet treatment
A chattel mortgage puts the asset and the matching loan on the business's balance sheet, like any owned asset funded with debt.
For an operating lease, the accounting standard matters. AASB 16, the lease accounting standard in force since 2019, requires a business that prepares financial statements under Australian Accounting Standards to bring most leases onto the balance sheet as a right-of-use asset and a matching lease liability. For those businesses the old off-balance-sheet treatment has mostly gone. There are limited exceptions for short-term leases of 12 months or less and for low-value assets. Many smaller businesses prepare only special-purpose or tax-based accounts and don't have to apply AASB 16, so for them an operating lease can still sit off the balance sheet. Whether the standard applies to you depends on the kind of accounts you prepare, not the size of the deal. Ask your accountant.
When a chattel mortgage suits
A chattel mortgage is usually right when the business wants to own the asset and use it to the end of its working life.
It suits a business that wants the depreciation deduction and the GST back in one BAS cycle instead of bit by bit across a lease. Take a profitable business buying a $200K piece of plant it plans to run for a decade. The upfront GST credit and the Division 40 depreciation (or an instant write-off, if eligible) are worth more to it than the smoother cashflow a lease offers.
It suits assets that hold their value and last a long time: yellow goods, manufacturing plant, trucks, trailers. There's little point paying a lender to carry residual risk on an asset that will last fifteen years and that you have no plan to hand back.
It also suits a business that wants to build equity in its assets. Every repayment cuts the debt on an asset the business already owns. At the end of the term, once any balloon is paid, the asset is free of debt and sits on the books at its written-down value.
When an operating lease suits
An operating lease is the right call when the business would rather use an asset than own it, and wants to hand the residual-value risk to the lender.
It suits assets that date fast: IT hardware, diagnostic and imaging equipment, point-of-sale fleets, anything where today's model is obsolete in three years. The business can refresh on a cycle without having to sell an old asset into a thin second-hand market.
It suits a business that wants the cost to show as a simple operating expense and, where AASB 16 doesn't apply to it, to keep the commitment off the balance sheet. For some businesses this matters to a lending covenant or to a board that watches gearing.
And it suits a business that wants no residual-value risk at all. On an asset with an uncertain resale market, the premium the lender charges to carry that risk can be cheaper than the loss you'd take trying to sell it yourself in three years.
When neither is the answer
Sometimes the right structure is neither a chattel mortgage nor an operating lease.
If the business wants to own the asset but spread the GST across the term like a lease, a hire purchase or a finance lease sits between the two. A finance lease keeps GST on the rentals but is built around the business taking the asset at the end by paying a residual. That's a different shape from an operating lease, where you simply hand the asset back.
If the asset is a car that you or a staff member will drive, read chattel mortgage vs novated lease instead.
Sometimes the answer isn't finance at all. A business with surplus cash after a strong year, buying an asset it will keep long term, may be better off paying cash and saving its borrowing capacity for a deal where borrowing actually helps. A broker should tell you when that's the case instead of writing finance for its own sake.
Choosing the structure is half the decision. The other half is which lender writes it, and whether a bank or a non-bank lender suits better. That moves the rate and the terms as much as the structure does. Aurelius Capital writes both across our asset finance panel.
If you're sizing up an asset purchase and want a broker's view on which structure suits your tax position and your asset, whether that's a chattel mortgage, an operating lease or something in between, the application form is below. Most enquiries get a response within four business hours.