Depending on the situation there are a few different ways you can pay for a work vehicle. If you’ve narrowed down your options to a novated lease versus a chattel mortgage, this simple comparison is designed to help you decide between the two.
What is it?
A novated lease is a finance arrangement that allows an employee to pay for their choice of car and its running costs directly through their salary with an income tax saving.
A chattel mortgage is a type of asset loan for businesses. A lender provides finance that can be used to purchase a vehicle, with the vehicle acting as security for the loan.
You, your employer and a novated lease provider.
A borrower and a chattel mortgage lender.
The lease finance provider retains ownership of the vehicle during the lease. At the end of the novated lease term, the employee pays the residual amount to take ownership of the vehicle.
With a chattel mortgage, the borrower owns the vehicle from the start. It effectively becomes a business asset.
Can be used solely for personal use, or a combination of business and personal use.
A chattel mortgage is only available if the vehicle is used for business purposes at least 51% of the time.
A novated lease is only available on passenger vehicles with a payload capacity below one tonne. Vehicle age restrictions usually apply.
A chattel mortgage can be used to finance any type of business vehicle or asset. Vehicle age limits generally apply.
Upfront discount on car
With a novated lease, there is a GST discount on the purchase price of the car as it’s purchased by a finance company on the employee’s behalf..
Eligible businesses can generally claim back the GST paid on a vehicle purchased with a chattel mortgage.
How are the payments made?
The employer deducts the novated lease payment amount from the employee's salary and pays it to the lease provider as part of each pay cycle.
The borrower makes the chattel mortgage repayments directly to the lender – generally weekly, fortnightly or monthly.
What do the regular payments cover?
Novated lease interest rates vary based on your application and credit history. The interest rate is fixed for the life of the lease.
Chattel mortgage interest rates vary based on the borrower’s application and credit history. The interest rate is usually fixed for the life of the loan.
Impact on business balance sheet
Known as the ‘residual payment’, this is a larger one-off payment required at the end of the novated lease for you to own the car outright.
You may have the option to include a balloon payment at the end of your chattel mortgage term. This is a large one-off payment that lowers the regular repayments.
Options at the end of the term
At the end of the chattel mortgage term the loan is closed out and any obligations to the lender end.
How long is the term?
A novated lease term can be any duration between six months and five years.
Chattel mortgage terms are generally between one and seven years.
A novated lease uses an employee’s pre-tax and post-tax salary to make finance repayments to a leasing company. The pre-tax payments reduce the employee’s total taxable income, which can even place the employee into a lower tax bracket, resulting in significant tax savings.
As the novated leasing company procures the vehicle, there is a GST discount (up to $6,191) on the initial purchase price of the vehicle.
The leasing company will estimate running costs for the vehicle, which are included in regular novated lease payments. Running costs include most things you might pay for in relation to the vehicle’s use throughout the term, such as:
You pay no GST on running costs for your vehicle under a novated lease.
Chattel mortgages are only used to finance business vehicles, which allows a business to immediately take advantage of the tax benefits of ownership. If your business is registered for GST on a cash basis and uses a chattel mortgage to purchase a vehicle:
Depreciation on the vehicle can be claimed through your end-of-year tax return. As the vehicle is registered as a business asset, interest on your chattel mortgage is also tax-deductible. You can only claim tax deductions on eligible expenses based on the proportion of the vehicle use that is business related, according to the ATO.
If your employer agrees to a novated leasing programme, you can choose the kind of vehicle that suits you and your lifestyle - from SUVs to 4WDs and sports cars. You can get a novated lease for a used car, as well as new vehicles. You are not restricted in vehicle choice in the way you might be based on a typical company car or fleet policy.
There are two restrictions to choosing a vehicle for a novated lease:
The only restriction on vehicles for a chattel mortgage is that the financed vehicle must be used for business purposes at least 51% of the time. Chattel mortgages can also be used to purchase any type of business vehicle, and are often also used to purchase heavy vehicles or machinery. This can include:
Unlike a car loan, you may be able to borrow more than 100% of the vehicle’s up-front cost in a chattel mortgage agreement. As a sole trader or business owner, this means you can include associated costs such as insurance and on-road costs, or aesthetic add-ons such as vinyl vehicle wraps for company branding.