What is equipment finance
Equipment finance covers the range of lending products used to fund the purchase or use of business assets including vehicles, machinery, technology, plant, and fit-out. Rather than paying for assets outright, equipment finance allows businesses to use the asset while repaying the cost over time.
The right structure depends on whether the business wants to own the asset outright, how it wants to treat the expense for accounting purposes, and how the business's accountant advises the purchase should be treated for GST and tax.
Always consult your accountant
The tax and GST treatment of different equipment finance structures varies significantly. The right structure for your business depends on your tax position, GST registration, and how you want the asset to appear on your balance sheet. Always confirm the preferred structure with your accountant before signing.
Chattel mortgage
Under a chattel mortgage, the business takes ownership of the asset immediately and the lender takes a mortgage (security interest) over it. The lender's security is released once the loan is repaid in full. This is the most common structure for business vehicles and equipment in Australia.
Because the business owns the asset from day one, it can claim depreciation on the asset and claim the GST on the purchase price upfront (in the BAS for the period of purchase, rather than spread across lease payments). Interest on the loan is also tax-deductible.
Finance lease
Under a finance lease, the lender owns the asset and leases it to the business for an agreed term. At the end of the lease, the business typically has the option to purchase the asset for a residual value, extend the lease, or return the asset.
Because the business does not own the asset, it cannot claim depreciation. Instead, lease payments are treated as operating expenses. GST is claimed on each payment rather than upfront. Finance leases have largely fallen out of favour since changes to accounting standards (AASB 16) brought most leases onto the balance sheet regardless.
Hire purchase
Under a hire purchase arrangement, the business hires the asset and pays instalments over time. Ownership transfers to the business once the final payment is made. It is similar to a chattel mortgage but with a different legal structure around when ownership transfers.
Hire purchase is less common than chattel mortgage for most business purposes today, but it remains a valid structure and some lenders prefer it for certain asset types.
Operating lease
An operating lease is a true rental arrangement. The business uses the asset but never owns it and the lessor bears the residual value risk. At the end of the term, the asset is returned. Operating leases are common for technology, office equipment, and fleet vehicles where the business prefers to avoid the risk of owning depreciating assets.
Operating leases are off-balance sheet for businesses applying older accounting standards, though most medium and large businesses now apply AASB 16 which brings most leases onto the balance sheet.
Tax and accounting treatment
The tax deductibility and GST treatment differ by structure. Chattel mortgage allows upfront GST claim and depreciation deduction. Finance leases allow GST on each payment and deduct lease payments as expenses. The right choice depends on whether the business is GST registered, whether it benefits more from upfront or ongoing deductions, and whether balance sheet treatment matters for its lending covenants or investor reporting.