Financing a work vehicle isn’t just about the interest rate. The structure you choose, chattel mortgage or novated lease, genuinely changes how GST, tax deductions, and ownership work, and getting it wrong can mean missing out on savings you were actually entitled to. This guide breaks down how each structure works, compares the tax treatment, and helps you work out which fits your situation.

What is a Chattel Mortgage?

A chattel mortgage is a business finance structure where you borrow to purchase a vehicle outright, and the lender takes a mortgage over the vehicle itself as security for the loan.

  • Your business owns the vehicle from day one, it sits on your balance sheet as an asset immediately
  • The lender’s security interest is over the vehicle, not a claim on ownership the way a lease works
  • If you’re registered for GST, you can generally claim the GST credit on the purchase price on your next Business Activity Statement, rather than spreading it across the loan term
  • Loan interest is tax-deductible where the vehicle is used for business purposes, and depreciation can be claimed over time

What is a Novated Lease?

A novated lease is a three-way agreement between an employee, their employer, and a leasing company, and it works fundamentally differently to a chattel mortgage.

  • The employer makes lease payments on the employee’s behalf, split between pre-tax and post-tax salary, which reduces the employee’s taxable income
  • The vehicle can be used for a mix of business and personal use, or entirely personal use, unlike a chattel mortgage
  • Because it’s structured as an employee benefit, Fringe Benefits Tax generally applies to the arrangement, though certain electric and plug-in hybrid vehicles currently qualify for an FBT exemption
  • Genuinely important to know upfront: a novated lease requires an actual employer willing to accept the lease obligation. A sole trader draws profit rather than a wage, so there’s no salary to package, which generally rules a novated lease out for sole traders entirely

Chattel Mortgage vs Novated Lease: The Key Differences

Beyond the tax treatment, the two structures suit fundamentally different situations.

  • Ownership. A chattel mortgage puts the vehicle on your business’s balance sheet immediately. A novated lease doesn’t, the vehicle sits with the leasing company and the employee
  • Who it’s for. A chattel mortgage is a business finance product, available to sole traders, partnerships and companies. A novated lease is available only to employees, including business owners who pay themselves as an employee of their own company
  • Vehicle use. A chattel mortgage assumes primarily business use. A novated lease works for personal use, business use, or a mix
  • Who manages depreciation and disposal. With a chattel mortgage, your business does. With a novated lease, the leasing company retains this responsibility, which simplifies things at the cost of losing direct depreciation benefits yourself

Tax, GST and Depreciation Treatment Compared

This is where the two structures genuinely diverge, and it’s worth understanding the mechanics before assuming one is automatically better.

  • Chattel mortgage. You can generally claim the GST credit on the purchase price upfront, claim depreciation over time, and deduct loan interest, all subject to the vehicle being used for business purposes and proper record-keeping
  • Novated lease. No GST is generally payable on the purchase price or running costs of the vehicle, and pre-tax salary payments reduce your taxable income directly
  • The car cost limit. For vehicles that meet the ATO’s definition of a car, depreciation and the GST credit you can claim are both capped, tied to a limit indexed each financial year. Utes with a payload over one tonne and vehicles built to carry nine or more passengers generally fall outside this cap, which is one reason work utes and vans are popular business purchases financed via chattel mortgage
  • EV FBT exemption. Eligible electric and plug-in hybrid vehicles under a novated lease can currently qualify for a full FBT exemption, up to the luxury car tax threshold for fuel-efficient vehicles, $91,661 for the 2026-27 financial year. This exemption is scheduled to change from 1 April 2027, when the full exemption will be capped at EVs priced up to $75,000, with a reduced concession applying above that

Who a Chattel Mortgage Suits

A chattel mortgage tends to suit businesses in a specific position, not every business owner needing a vehicle.

  • Businesses wanting the vehicle recorded as an asset on the balance sheet from day one
  • Vehicles used predominantly for business purposes, particularly work utes, vans, and trade vehicles
  • Sole traders and businesses without a separate employer entity to structure a novated lease through
  • Businesses with strong cash flow wanting to claim GST credits and depreciation directly, rather than trading that for reduced taxable income via salary packaging

Who a Novated Lease Suits

A novated lease tends to suit a different profile of buyer entirely.

  • Employees, including company directors paid as employees, wanting a vehicle for mixed personal and business use
  • Buyers wanting predictable, bundled monthly costs covering finance, running costs, and sometimes insurance in one deduction
  • Buyers considering an eligible electric or plug-in hybrid vehicle, where the current FBT exemption makes the structure particularly cost-effective
  • Employees who don’t want to manage depreciation, vehicle disposal, or GST reporting themselves

Other Options: Hire Purchase and Finance Lease

Chattel mortgage and novated lease aren’t the only two structures worth knowing about.

  • Hire purchase. Similar in spirit to a chattel mortgage, but the finance company retains legal ownership of the vehicle until the final payment is made, rather than the business owning it from day one
  • Finance lease. The finance company owns the vehicle throughout the lease term, and your business makes regular lease payments to use it, generally deducted as an operating expense rather than claimed via interest and depreciation separately, with an option to purchase the vehicle for a residual amount at the end of the term

Both structures suit specific cash flow and ownership preferences, and it’s worth comparing them against a chattel mortgage before committing to either.

How to Choose the Right Structure for Your Business

A few questions genuinely narrow down which structure fits your situation.

  • Is the vehicle for business use, personal use, or a genuine mix?
  • Are you a sole trader, or does your business have an employer entity that could offer a novated lease?
  • Do you want the vehicle as a balance sheet asset, or would you rather someone else manage depreciation and disposal?
  • Are you considering an electric or plug-in hybrid vehicle, where the current FBT exemption could change the numbers significantly?

The right answer genuinely depends on your business structure and how the vehicle will be used, not a general rule that applies to everyone. We compare financing options across our lender panel and help you work through which structure suits your actual situation, rather than assuming one fits.

FAQs

Can a sole trader get 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’s no salary arrangement to package the vehicle through.

Do I need to use the vehicle for business to get a chattel mortgage?
A chattel mortgage is specifically a business finance product, so the vehicle generally needs a business use component to access the associated tax benefits like GST credits, depreciation, and interest deductions.

Are electric vehicles cheaper to finance through a novated lease?
Currently, eligible electric and plug-in hybrid vehicles under the luxury car tax threshold for fuel-efficient vehicles can qualify for a full FBT exemption under a novated lease, which can make this structure particularly cost-effective. These rules are scheduled to change from 1 April 2027, so it’s worth confirming current eligibility before deciding.

Is a chattel mortgage or novated lease better for tax purposes?
Neither is universally better, they deliver different types of tax benefit to different parties. A chattel mortgage benefits the business through GST credits, depreciation, and interest deductions. A novated lease benefits the individual employee through reduced taxable income. The right structure depends on your business setup and how the vehicle will be used.

Speak to a Broker About Financing Your Business Vehicle

Choosing between a chattel mortgage and a novated lease depends on your specific business structure, vehicle use, and goals, not a general rule that applies to everyone. Speak to a broker about comparing financing options across our lender panel, including business loans, car loans, and asset and equipment finance.

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This is general information only and does not constitute financial, credit, or tax advice. GST, FBT, and depreciation treatment depend on your specific circumstances and can change with ATO rules, always confirm your position with a registered tax agent alongside speaking to a licensed broker.