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Chattel Mortgage

A chattel mortgage is a type of finance used by businesses of all structure types to purchase assets. Chattel mortgage is essentially a mortgage over goods to be financed. The ownership transfers to the borrower at sale, the finance company takes a mortgage over the chattels. A chattel refers to property which is easily movable or in other words, any tangible property other than land, buildings and other things fixed to land. Often the lender will require the equipment to have at least a serial code to identify should recourse occur.

The term allowable is between 1 and 5 years, though sometimes up to 7 years. Deposits can be made in any quantity, and a residual (balloon)  is allowed with the residual size usually being regulated by the lender.

The borrower can claim depreciation, running costs and interest paid (but not the principal repayments). An important feature of the chattel mortgage is that the borrower can claim the full input tax credit from the GST incurred immediately.

Commercial Hire Purchase (CHP)

The Commercial Hire Purchase (CHP) or Hire Purchase is similar to the chattel mortgage, however the main difference is that the lender holds title of security until all payments have been made. This affects the borrower’s GST claims, whereby if they are using the cash accounting method, they must claim the GST over the term and not in the next BAS as with the chattel mortgage.

The term allowable is between 1 and 5 years, though sometimes up to 7 years. Deposits can be made in any quantity, and a residual is allowed with the residual size usually being regulated by the lender. The borrower can claim depreciation, running costs and interest paid (but not the principal repayments).

Note: It is important to get accounting advice on CHPs as a CHP may appear more expensive than a chattel mortgage, but if the client is GST registered then the net cost may be similar or less than a chattel mortgage.

Lease

The finance lease is heavily regulated by the ATO. As with a CHP the funder holds ownership of the asset and the borrower claims each payment as a fully tax deductable expense. The ATO seeks to dissuade borrowers from claiming the full value of an asset before the asset reaches the end of its life by enforcing minimum residual values which are noted below for assets with an effective life of eight years:

Minimum Residual Value – Percentage of Cost

Year 1 = 65.63%

Year 2 = 56.25%

Year 3 = 46.88%

Year 4 = 37.50%

Year 5 = 28.13%

The term allowable is between 1 and 5 years. Deposits are not allowed but the lender may sometimes allow a large first rental up to the maximum value of 12 monthly payments.

Employees often novate a lease whereby the employer pays the lease, claims the GST charged on the lease payment and deducts the payment from the employee’s pre-tax income. This reduces the employee’s income tax and can be beneficial, though Fringe Benefits Tax (FBT) is usually due in this arrangement. Employers are often comfortable with a novated lease as if the employee leaves them, so does the lease liability.

When comparing a lease to the CHP and chattel mortgage, the claims in a lease are uniform throughout the term, with up to 100% of 12 payments claimed per year. A CHP and chattel mortgage on the other hand, have most of their claims at the start of the term, as lenders charge more interest at the start and most depreciation occurs at the start of an asset’s life. Most contracts are exited early, so a lot of borrowers opt for a CHP or chattel mortgage as they maximise their claims if they leave the contract mid-term.

 

 

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