Equipment finance in Australia: every structure compared

There are four ways to finance equipment in Australia: chattel mortgage, finance lease, operating lease and rental. One question separates them: who owns the asset, and who carries the risk of what it is worth at the end. Everything else, including the tax treatment, follows from that answer.

The four structures compared

The table is the article. The rest is why each row matters.

Chattel mortgage: you own it, they hold security

A chattel mortgage is a loan with security taken over the equipment. "Chattel" is simply the legal word for a moveable good. You buy the asset and own it from the moment it settles; the financier registers an interest so they can take it back if you stop paying.

This is the default structure for most Australian small businesses buying trucks, excavators, ovens and workshop gear, and there are two reasons for that.

The first is GST timing. Because you are treated as buying the asset outright, a GST-registered business on the accruals basis can generally claim the GST on the full purchase price in the BAS for the period in which the purchase happens, rather than a slice at a time across the term. On a $110,000 machine that is a meaningful amount of cash returning to the business early.

The second is simplicity at the end. There is no residual to argue about and no return condition report. When the last payment clears, the security is released and the asset is unambiguously yours.

Where it is the wrong choice: equipment that will be obsolete before it is paid off. Owning a five-year-old piece of technology nobody wants is not an asset, it is a disposal problem.

Finance lease: they own it, you carry the residual

Under a finance lease the financier buys the asset and leases it to you for an agreed term. You have use and control; they have title. At the end there is a residual value, sometimes called a balloon, that has to be dealt with.

The residual is the crux. It is set at the start, it is a real obligation, and it does not go away because the asset turned out to be worth less than expected. If you agree a $30,000 residual on a machine that is worth $18,000 in four years, the gap is yours.

That cuts both ways. A higher residual means lower monthly payments across the term, which is why residuals get used to make a deal fit a budget. It is a legitimate tool and it is also the most common way a finance arrangement becomes a problem in year four.

Finance leases suit businesses that want the asset, want lower payments during the term, and have a clear plan for the residual: refinance it, pay it out, or sell the asset into a market they understand.

Operating lease and rental: they own it and they keep the risk

With an operating lease the financier retains the residual risk. You use the equipment for the term, you hand it back at the end, and if the asset is worth less than the financier hoped, that is their problem.

You pay for that transfer of risk. Operating lease payments are typically higher than a finance lease over the same term for the same asset, because the financier is pricing in the uncertainty of what they will get back.

The trade is worth it when:

• The technology moves faster than the finance term. Diagnostic and imaging equipment, IT hardware, and anything with a software dependency.
• You genuinely do not want the asset at the end. Some equipment has a disposal cost rather than a resale value.
• Utilisation is uncertain. A rental you can exit is worth more than a cheaper facility you cannot.

Rental sits at the shortest and most flexible end of the same idea. It suits a specific project, a seasonal peak, or trialling a machine before committing to it.

What about the "off balance sheet" claim?

You will still see operating leases described as off balance sheet. Treat that with caution.

Accounting standards were changed some years ago so that most leases conferring a right to use an asset are now recognised on the balance sheet as a right-of-use asset and a corresponding liability. For businesses preparing financial statements under those standards, the old distinction has largely gone.

This matters if you have loan covenants tied to gearing or interest cover. A structure chosen years ago to keep debt off the balance sheet may not do that any more. If someone is selling you a structure primarily on that basis, ask them to confirm it against the standards your accountant actually applies to your business.

Which structure is cheapest?

The honest answer is that the sticker comparison is usually the wrong comparison.

Comparing a chattel mortgage payment against an operating lease payment on the same machine tells you very little, because the two payments buy different things. One ends with you owning an asset. The other ends with you owning nothing and owing nothing.

The comparison worth making is total cost of ownership across the period you will actually use the equipment, including:

• Every payment across the term.
• Establishment and account fees.
• The residual, if there is one, and what you realistically expect the asset to be worth at that point.
• Disposal cost or resale proceeds.
• GST timing, which is a cash flow effect rather than a cost, but a real one.

Run those five lines for each structure on the specific machine you are buying. The answer changes by asset type more than it changes by lender.

For a worked comparison of how effective cost is calculated across different structures, see our guide on the effective annual rate on business loans.

What do lenders assess on an equipment application?

Four things, roughly in this order.

The asset. What it is, how old it is, who made it, and whether there is a resale market. A late-model machine from a major manufacturer is straightforward. A specialised piece of kit with three possible buyers in the country is not.

The age at end of term. Most lenders cap how old an asset can be when the finance ends, commonly around 12 to 15 years for heavy machinery and less for other categories. This is what limits the term available on used equipment.

Your trading history. Two years of financials opens the widest set of options. Businesses under 12 months old have fewer but not zero, particularly where the director has industry experience.

Whether it is a private sale or a dealer sale. Dealer purchases are simpler. Private sales require the lender to verify title, check for existing security interests, and handle the settlement, which takes longer and is declined more often.

Do you need a deposit?

Not always. Where the asset is new, from a recognised supplier, and the business has trading history, no-deposit structures are common. See equipment finance with no upfront cost for when that is genuinely available.

Deposits get asked for when the asset is used, specialised, privately sold, or where the business is new. A deposit reduces the lender's exposure against an uncertain resale value, so anything that makes the resale value less certain increases the deposit.

Getting the structure right

The decision reduces to two questions.

Do I want this asset in five years? If yes, chattel mortgage or finance lease. If no, operating lease or rental.

Does this asset hold its value? If yes, carrying the residual risk yourself is usually cheaper. If no, paying someone else to carry it is usually money well spent.

Everything else, including the tax treatment, is downstream of those two answers. Your accountant should confirm the tax position for your structure before you sign, because it varies with your entity type, your GST registration and your reporting basis.

General information only - it doesn't take your situation into account. Consider whether a product suits your business before acting, and get independent advice where you need it. No credit check to see your options. A credit check only happens if you choose to formally proceed with a lender.