Your accountant says chattel mortgage. The bloke who runs the business next door swears by his novated lease and cannot understand why you would do anything else. Both of them can be right, because they are describing two arrangements built for two different kinds of people. Pick the wrong one and you may lose the upfront GST claim, the depreciation deduction, or the ability to use the arrangement at all.
Short answer: A chattel mortgage is a business loan where your business owns the vehicle from settlement and claims the GST, interest and depreciation itself. A novated lease is a salary packaging arrangement that only exists where there is an employer and an employee, with payments coming out of the employee’s pay. If nobody pays you a wage, a novated lease is not on the table.
What is a chattel mortgage in plain terms?
A chattel mortgage is a loan secured against the vehicle itself. Your business takes ownership at settlement, and the lender registers its security interest on the Personal Property Securities Register. You repay principal and interest over a fixed term, and the lender’s interest is released once the final payment clears.
Because the business holds title from day one, the asset sits on your balance sheet and the tax treatment follows normal business rules. If you are registered for GST on an accruals basis, the GST on the purchase price is generally claimable in the BAS period the vehicle is acquired rather than being spread across the term. The interest portion of each repayment and the depreciation on the vehicle are usually deductible to the extent of business use. Our guide on what a chattel mortgage is works through the mechanics in more detail.
Terms of 12 to 84 months are common, deposits and trade-ins are optional, and a balloon or residual can be set at the end to lower monthly repayments.
What is a novated lease and who can actually use one?
A novated lease is a three-way arrangement between an employee, their employer and a financier. The financier leases the car to the employee, then a deed of novation transfers the payment obligation to the employer, who deducts it from the employee’s pay. Remove any one of those three parties and the structure collapses.
Most novated leases are fully maintained, meaning fuel, servicing, tyres, registration and insurance are bundled into a single deduction. Part of that deduction comes from pre-tax salary and part usually from post-tax salary under the employee contribution method, which is used to reduce the fringe benefits tax liability the employer would otherwise carry.
The catch that surprises people: if the employee leaves the job, the novation ends and the lease obligation reverts to them personally. Sole traders and partners cannot novate their own vehicle because they draw profit rather than a wage. We cover that scenario in detail in novated leases for sole traders.
How do the tax and GST outcomes compare?
The two arrangements pull different tax levers. A chattel mortgage delivers deductions to the business through interest and depreciation, plus an upfront GST credit. A novated lease delivers a benefit to the individual by reducing their taxable income, while the employer manages GST and FBT on the vehicle.
| Feature | Chattel mortgage | Novated lease |
|---|---|---|
| Who can use it | Any business with an ABN, including sole traders | PAYG employees whose employer offers salary packaging |
| Who owns the vehicle | Your business, from settlement | The financier, for the term of the lease |
| Where it sits | On the business balance sheet as an asset and a liability | Off the employee’s balance sheet, managed through payroll |
| GST on purchase price | Generally claimable upfront by the business if registered on accruals | Handled by the financier and employer, not the employee |
| Main deductions | Interest portion plus depreciation, to the extent of business use | Reduced taxable income for the employee |
| FBT exposure | None from the finance arrangement itself | Yes, a car fringe benefit arises for the employer |
| Typical term | 12 to 84 months | 12 to 60 months |
| End of term | You already own it, balloon payable if one was set | Residual payable to take ownership, or refinance or return |
Comparison is indicative only and general in nature. Confirm the treatment that applies to your circumstances with your lender and your accountant.
Two limits are worth knowing before you get excited about deductions. For vehicles that meet the ATO definition of a car, depreciation is capped at the car cost limit, which is indexed each financial year, and the GST credit is capped at one eleventh of that limit. Utes with a payload above one tonne and vehicles built to carry nine or more passengers generally fall outside that cap, which is one reason work utes and vans are so popular as business purchases. Depending on the current thresholds, an immediate deduction may also be available, and our article on the instant asset write-off explains how that interacts with financed assets.
On the novated side, eligible zero and low emissions vehicles first held and used after 1 July 2022 and priced below the luxury car tax threshold for fuel-efficient vehicles may attract an FBT exemption. The rules around plug-in hybrids have changed since, so treat any EV packaging quote as a starting point and confirm the current position before you commit.
What happens at the end of each arrangement?
With a chattel mortgage you already own the vehicle, so the end of term is simply the last payment plus any balloon you agreed to. With a novated lease, a residual value is payable if the employee wants to keep the car. The ATO publishes minimum residual percentages that lease terms are expected to meet.
| Lease term | ATO minimum residual (% of original cost) |
|---|---|
| 12 months | 65.63% |
| 24 months | 56.25% |
| 36 months | 46.88% |
| 48 months | 37.50% |
| 60 months | 28.13% |
Minimum percentages only, shown for illustration. Your financier may set a higher residual. Confirm the figure in your own quote.
A balloon on a chattel mortgage works on similar logic, and choosing the wrong figure can leave you with a payout larger than the vehicle is worth. Our explainer on balloon payments covers how to set one sensibly.
Which one suits a business owner buying a work vehicle?
For most business owners buying a genuine work vehicle, a chattel mortgage is the more practical structure. It keeps ownership, GST and depreciation inside the business, and it does not depend on payroll arrangements. A novated lease only makes sense where a salaried employee is involved and the employer already runs a packaging program.
A chattel mortgage tends to suit you if:
- You trade as a sole trader, partnership, company or trust and the vehicle is for business use
- You want the GST credit in the business rather than in someone’s pay packet
- You intend to keep the vehicle beyond the finance term
- You want flexibility on term, deposit and balloon
A novated lease tends to suit you if:
- You or a staff member are paid a salary through PAYG
- The employer is willing to sign a deed of novation and manage FBT
- The vehicle is used substantially for private purposes
- Bundling running costs into one deduction is worth more to you than ownership
If you are financing more than one vehicle, or a mix of company cars and staff vehicles, it is worth structuring the whole set together rather than deal by deal. Our business vehicle finance page outlines how that usually works.
What should you check before you commit?
Quotes for these two products are not directly comparable on the monthly figure alone, because one bundles running costs and the other does not. Strip both back to what you are actually paying for before you sign.
- Confirm whether the quoted payment includes fuel, servicing, tyres and insurance
- Ask for the total cost over the full term, including any balloon or residual
- Check early payout terms and whether the contract is a fixed rate for the full period
- Confirm establishment, account keeping and end of term fees in writing
- Have your accountant confirm the GST, FBT and depreciation position for your structure
- Check the vehicle qualifies for the treatment you are relying on, particularly for utes and EVs
None of this is financial advice, and the right answer genuinely depends on how your business is set up and how the vehicle will be used.
If you are weighing a chattel mortgage against packaging a car through an employer, put the real numbers side by side before you decide. TYG Finance has access to more than 80 lenders and can model the options against your structure. Get in touch with the team or call 1300 894 894.
Can a sole trader take out a novated lease?
Generally no. A novated lease requires an employer to accept the lease obligation and deduct payments from an employee’s pay. A sole trader draws profit rather than a wage, so there is no salary to package. A chattel mortgage or ABN car loan is usually the workable alternative.
Does a chattel mortgage appear on my business balance sheet?
Yes. Because your business owns the vehicle from settlement, the asset and the corresponding liability both appear in your accounts. That can affect how a future lender assesses your borrowing capacity, so it is worth mentioning if you have other finance planned.
Which option gives a bigger tax benefit?
They benefit different taxpayers. A chattel mortgage delivers deductions and GST credits to the business. A novated lease reduces the individual employee’s taxable income. Comparing them purely on tax benefit is not meaningful unless you first decide which entity is buying the vehicle.
Can I refinance a novated lease if I change jobs?
Often yes. When employment ends the novation ceases and the obligation reverts to you personally. Options may include novating to a new employer that offers packaging, refinancing the balance into a consumer or business loan, or paying out the lease. Speak to your financier early.
Is a chattel mortgage regulated by consumer credit law?
Where the vehicle is used predominantly for business purposes, the arrangement generally sits outside the National Consumer Credit Protection Act. That means fewer consumer protections apply, so read the contract carefully and ask questions about fees, default provisions and early payout before signing.