Novated Lease Vs Chattel Mortgage Comparison

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Written byBevan GuestReviewed bySean Callery

Want to compare a novated lease against a chattel mortgage?

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.

	Novated lease	Chattel mortgage
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.
Who’s involved	You, your employer and a novated lease provider.	A borrower and a chattel mortgage lender.
Vehicle ownership	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.
Vehicle usage	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.
Restrictions	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?	The cost of leasing the vehicle Related car-running costs (e.g. fuel/charging, insurance, registration and CTP, servicing and tyres) Finance costs and admin fee	The mortgage amount (loan principal) Interest and fees
Tax implications	Up-front GST discount on vehicle cost Income tax saving as the lease payments lower your taxable income GST saving on packaged car-running costs Lease may be subject to fringe benefits tax (unless it’s an eligible EV or PHEV)	Business can claim back the GST on the vehicle purchase Interest and fees are generally tax deductible (based on the percentage of business use of the vehicle) Repayments of the loan itself (the principal) are not tax deductible
Interest rates	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.
Fees	Finance establishment fee Regular novated lease admin fee	Finance establishment fee Regular loan servicing fee
Impact on business balance sheet	A novated lease is not recorded on the business balance sheet	A chattel mortgage is recorded on the business balance sheet, as is the asset it has funded
Balloon payment	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	Make the residual payment to own the car outright. Trade in the car and start a new lease with a new car. Renew/extend your lease with the same car.	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.
Eligibility	Must be an employee of a company that offers novated leasing as a benefit. Must be an Australian citizen or permanent resident. Must be over 18 years of age. Must pass a credit check and meet the finance provider’s other criteria (a bad credit novated lease may still available depending on the situation).	Must be an Australian citizen or permanent resident. Must have a valid ABN and be over 18 years of age. Must pass a credit check and meet the finance provider’s other criteria. Must be using the vehicle for business at least half of the time.

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Novated lease vs chattel mortgage tax and GST benefits in more detail

Novated lease

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.

For eligible EV and PHEV novated leases, 100% of the novated lease payment can be made using pre-tax salary, as these vehicles are exempt from fringe benefits tax.

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:

Registration and CTP
Car insurance
Servicing costs
Replacement tyres
Petrol or charging costs
Vehicle repairs

You pay no GST on running costs for your vehicle under a novated lease.

Chattel mortgage

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:

The vehicle becomes an asset on the business’s balance sheet
You can claim the initial purchase-price GST back on your next Business Activity Statement (BAS) following the establishment of the chattel mortgage.

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.

Novated Lease vs Chattel Mortgage vehicle restrictions

Novated lease

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:

You can only finance a passenger vehicle (including utes)
The vehicle’s maximum payload cannot exceed 1,000 kg

Chattel mortgage

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:

Cars and motorcycles
Work/delivery vans
Work utes
Trucks and trailers
Buses
Diggers
Forklifts
Heavy machinery

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.

Novated lease pros

The vehicle can be used exclusively for personal use, business, or a combination of the two
Convenient salary packaging of the vehicle’s running costs in addition to the lease
Tax benefits (GST and income tax) - this is a major advantage of a novated lease

Novated lease cons

Vehicle must not exceed a maximum payload of 1,000 kg
Cannot be used for machinery or delivery trucks and vehicles

Chattel mortgage pros

Vehicle recognised as a business asset
Business can reclaim the GST on the vehicle’s initial purchase in the next BAS
Can be used for non-passenger vehicles

Chattel mortgage cons

Monthly instalments and the residual balance (balloon) are not tax-deductible.
Accounting work involved in claiming GST and deductions can involve more work than using a novated lease.
Vehicle must be used for business purposes at least 51% of the time