Chattel mortgage or finance lease: choosing your structure

Under a chattel mortgage, title transfers to your business the moment the deal settles. The lender protects itself by registering a security interest on the Personal Property Securities Register, the national register of such interests, which it removes once the final payment clears. Because the asset is yours, you decide how it is used: fit a crane to the truck, wrap the van in your branding, send the excavator interstate for a contract. You can even sell mid-term, provided the loan is paid out from the proceeds.

A finance lease reverses the roles. The lender buys the asset and remains its legal owner; your business is the lessee, paying agreed rentals for its use. Lease documents typically set conditions around maintenance, insurance and permitted use, because the owner wants its asset protected. At the end of the term you face the residual decision — pay the residual amount to acquire the asset, hand it back, or in some cases extend the arrangement. Until that point, the asset was never yours to sell.

Speaking generally, a chattel mortgage often appeals to GST-registered businesses because the GST component of the purchase price may be claimable upfront on the relevant activity statement, rather than drip-fed through the term. From there, interest charges and depreciation on the asset may be deductible to the extent it is used to earn business income. Every one of those 'may's is deliberate: eligibility, timing and thresholds shift with legislation and with your structure, and only your accountant can confirm how the rules land on you.

A finance lease works differently: GST is typically embedded in each rental payment, and it is the rental itself — not interest and depreciation — that may be deductible for the business use of the asset. Accounting standards have also changed how leases appear on balance sheets in recent years, which dissolved some of the old 'off balance sheet' folklore. If the accounting presentation matters to your covenants or investors, that conversation belongs with your accountant before you sign, not after.

A balloon on a chattel mortgage is a structuring choice — a slice of the amount financed deferred to the end of the term as a lump sum, on an asset your business already owns. Whether to have one at all, and how large, is negotiated when the loan is written. When the term ends, the balloon is simply the last obligation on your own asset: pay it out, refinance it, or sell the asset and clear it from the proceeds.

A residual on a finance lease looks similar in a repayment schedule but sits on different legal footing: it is the price of acquiring an asset you do not yet own. Residuals are generally set within guidelines intended to reflect the asset's expected value at term end, which limits how aggressively they can be shrunk or inflated. The practical difference shows up in the final month — a lessee weighing the residual against the asset's market value is making a purchase decision, not just closing out a loan.

The chattel mortgage is the volume seller in Australian asset finance for straightforward reasons: most operators intend to keep their gear, want the equity that builds as the loan amortises, and — in general terms — like the upfront GST position, subject to their accountant's confirmation. If you picture the same machine in your yard in six years, ownership from day one usually fits the picture. For operators buying gear they intend to run into the ground, it is the natural starting point.

Leases earn their keep in different circumstances: fleets refreshed on fixed cycles, technology that dates quickly, or businesses that think in usage costs rather than asset values. Neither structure is inherently better; they are different answers to how long you want the asset and who should carry the ownership decisions. Write down your honest intention for the asset at term end, take it to your accountant, and the structure usually chooses itself.