When financing a vehicle for business use, the structure you choose affects ownership, tax deductions, GST claims, and your balance sheet. According to the Australian Taxation Office (ATO), the way you finance a vehicle determines which deductions you can claim.
Important Tax Disclaimer
This guide provides general information only. Tax laws are complex and change frequently. Always consult with a qualified accountant or tax professional before making finance decisions. The information here is current as of January 2025.
Chattel Mortgage
A chattel mortgage is a finance arrangement where your business takes ownership of the vehicle from day one, while the lender holds a mortgage over it until the loan is fully repaid. This is the most popular business vehicle finance option in Australia.
How It Works
- 1The lender purchases the vehicle on your behalf
- 2Your business takes immediate ownership (vehicle registered in your name)
- 3You make regular repayments including interest
- 4The mortgage is discharged when the loan is fully paid
Tax Benefits
GST Claimed Upfront
You can claim the GST on the purchase price as an input tax credit on your next BAS. For the 2024-25 FY, the car limit for depreciation is $68,108 (GST inclusive), meaning maximum GST claim is approximately $6,191.
Depreciation Deductions
As the owner, you can claim depreciation on the vehicle's value over its effective life. Small businesses may be eligible for instant asset write-off.
Interest Deductions
The interest component of your repayments is tax-deductible as a business expense.
Advantages
- • Own the vehicle from day one
- • Claim GST upfront
- • Claim depreciation
- • Flexible balloon/residual options
- • No kilometre restrictions
Considerations
- • Vehicle appears on balance sheet
- • Must be used 51%+ for business
- • Responsible for maintenance
- • Car limit caps depreciation claims
Finance Lease
A finance lease is a long-term rental arrangement where the lender owns the vehicle throughout the lease term. At the end, you typically have the option to purchase the vehicle for a pre-agreed residual value, extend the lease, or return the vehicle.
How It Works
- 1The lender purchases and owns the vehicle
- 2You make regular lease payments for the use of the vehicle
- 3At lease end, you can purchase, extend, or return
Tax Benefits
Lease Payments Deductible
The full lease payment (minus the principal component for a finance lease) is generally tax-deductible as a business expense.
GST Claimed Progressively
GST is claimed on each lease payment as they're made, spreading the GST benefit over the lease term.
No Depreciation
Since you don't own the vehicle, you cannot claim depreciation. However, the lease payments effectively replace this deduction.
Advantages
- • May be off-balance sheet (depends on accounting)
- • Predictable fixed payments
- • Option to purchase at end
- • Can include running costs in payments
Considerations
- • Don't own the vehicle during lease
- • No depreciation claims
- • GST spread over lease term
- • May have kilometre restrictions
Operating Lease
An operating lease is essentially a long-term rental. The lender retains ownership throughout, and at the end of the lease, you simply return the vehicle. There's no residual payment or option to purchase (in a true operating lease).
How It Works
- 1The lender purchases and owns the vehicle
- 2You pay to use the vehicle for the agreed term
- 3At lease end, you return the vehicle (no residual obligation)
Tax Benefits
Fully Deductible Payments
The entire lease payment is generally tax-deductible as an operating expense.
Off-Balance Sheet
The vehicle doesn't appear as an asset or liability on your balance sheet, which can improve financial ratios.
Advantages
- • Off-balance sheet financing
- • No residual risk
- • Easy to upgrade vehicles regularly
- • Can include maintenance packages
Considerations
- • No ownership or equity
- • Strict kilometre limits usually apply
- • Wear and tear charges at return
- • Generally higher cost overall
Quick Comparison
| Feature | Chattel Mortgage | Finance Lease | Operating Lease |
|---|---|---|---|
| Ownership | Business from day 1 | Lender (option to buy) | Lender (return at end) |
| GST Claim | Upfront on purchase | Progressive on payments | Progressive on payments |
| Depreciation | Yes, claimable | No | No |
| Interest/Payment Deduction | Interest only | Lease payments | Full lease payments |
| Balance Sheet | Asset + Liability | May appear | Off-balance sheet |
| Best For | Maximising tax deductions | Flexibility + option to own | Regular upgrades, no ownership |
Which Option Should You Choose?
Choose Chattel Mortgage If...
- You want to own the vehicle outright and build equity
- Your business is GST-registered and wants to claim GST upfront
- You want to maximise depreciation and interest deductions
- You plan to keep the vehicle long-term
Choose Finance Lease If...
- You want flexibility at the end of the term
- You prefer spreading GST claims over time
- You want bundled maintenance packages
Choose Operating Lease If...
- You want to keep the vehicle off your balance sheet
- You prefer to upgrade vehicles regularly (every 2-3 years)
- You don't want residual value risk
- Your business doesn't need to own assets
Official Resources
Need Help Choosing?
Our team can help you understand which finance structure best suits your business needs and tax situation. We work with multiple lenders offering all finance types.