When you purchase commercial equipment outright or through a structure that transfers ownership to you, the asset sits on your balance sheet and you claim the associated deductions.
The decision facing most self-employed operators is whether to own the asset from the start, take on ownership progressively through hire purchase, or structure a chattel mortgage where title transfers at the end. Each affects your working capital differently and alters how depreciation and interest are treated for tax purposes.
Chattel Mortgage: Ownership With Finance Attached
A chattel mortgage gives you full ownership of the asset from day one, but the lender holds security over it until the facility is paid off. You claim depreciation on the full purchase price and deduct the interest portion of each repayment as a business expense.
Consider a cabinet maker who finances a CNC router valued at $85,000 through a chattel mortgage. They pay a 20% deposit and finance the remainder over five years with a 30% balloon payment at the end. Because they own the equipment outright, they begin depreciating it immediately using the appropriate effective life determined by the ATO. The interest component of each monthly repayment is also deductible, while the principal portion reduces the loan balance.
At the end of the term, the balloon payment of around $25,500 becomes due. The cabinet maker can refinance this amount, pay it from retained earnings, or sell the equipment and settle the balloon from the proceeds. Ownership remains with them throughout.
Hire Purchase: Ownership at the End of the Term
Under hire purchase, you do not own the asset until the final payment is made. Despite this, the ATO allows you to claim depreciation as if you owned it from the start, and the interest portion of each payment remains deductible.
In practice, hire purchase often suits operators who want fixed monthly repayments without a balloon payment and prefer not to hold legal title until the debt is cleared. The monthly repayment is typically higher than a chattel mortgage with a balloon, but there is no lump sum to manage at the end.
A concreting contractor financing three utes through hire purchase over four years pays a higher monthly amount than they would under a chattel mortgage with a 20% balloon, but avoids the refinancing or cash requirement when the term ends. Once the final repayment is made, title transfers automatically.
How Depreciation Works When You Own the Asset
Depreciation is calculated using either the diminishing value or prime cost method, and you begin claiming it from the date the asset is first used or installed. The total depreciation you can claim over the life of the asset is not affected by whether you used a chattel mortgage or hire purchase, but your ability to start claiming immediately depends on the structure allowing you to be treated as the owner for tax purposes.
Both chattel mortgage and hire purchase meet this condition. Operating leases do not, because the lessor retains ownership and claims the depreciation themselves.
The instant asset write-off threshold has varied over time, and if your equipment falls below the current cap and is used predominantly in your business, you may be able to deduct the full cost in the year of purchase rather than depreciating it over several years. This applies regardless of whether you used cash, chattel mortgage, or hire purchase to fund the acquisition.
Balloon Payments and How They Affect Cash Flow
A balloon payment reduces your monthly repayment amount by deferring a portion of the principal to the end of the term. It does not reduce the total interest you pay over the life of the facility unless you settle the balloon early.
Balloon payments are common in vehicle finance and equipment finance structures where the business expects to upgrade the asset before the term ends or anticipates improved cash flow by the time the balloon is due. The maximum balloon percentage depends on the asset type and the lender's policy, but typically sits between 20% and 50% for commercial vehicles and equipment.
If you plan to refinance the balloon, factor in the interest cost of carrying that amount for an additional term. If you intend to sell the asset and use the proceeds to clear the balloon, confirm that the expected residual value aligns with the balloon amount. Overestimating residual value leaves you with a shortfall that must be covered from other funds.
When Outright Purchase Makes Sense
Paying cash for an asset eliminates interest costs and keeps the balance sheet unencumbered, but ties up working capital that may deliver better returns if deployed elsewhere in the business. Outright purchase suits operators with strong cash reserves who do not want ongoing repayment obligations or who are acquiring equipment with a long useful life that will not require replacement within a typical finance term.
A civil contractor purchasing a 20-tonne excavator for $180,000 may choose to pay cash if they have surplus funds and expect to use the machine for a decade or more. They still claim depreciation each year, but avoid interest charges and monthly commitments.
The trade-off is opportunity cost. That $180,000 could have been used to hire additional labour, purchase materials in bulk, or take on a larger contract that generates margin exceeding the interest rate on a finance facility. The decision hinges on what the capital achieves if left in the business rather than locked into a depreciating asset.
GST Treatment Under Ownership Structures
If you are registered for GST and acquire an asset through chattel mortgage or hire purchase, you can typically claim the GST component in your next business activity statement, provided the asset is used for creditable purposes. This provides an immediate cash flow benefit, as you recover the GST before the asset is fully paid off.
Under an operating lease, GST is claimed progressively on each rental payment rather than upfront on the full asset value. This difference affects the timing of cash flow and should be factored into any comparison between ownership and lease structures.
Linking Finance Structure to Upgrade Cycles
If your business relies on technology or equipment that becomes obsolete quickly, aligning the finance term with the intended upgrade cycle avoids paying off an asset you no longer want to use. A three-year term with a 40% balloon on IT hardware allows you to trade or return the equipment at the end of the term and move to updated models without continuing to service debt on outdated gear.
Plant and machinery finance for industries like manufacturing or logistics often uses longer terms to match the operational life of the asset, while hospitality or medical equipment may suit shorter terms with balloons that accommodate faster replacement.
The finance structure should follow the business need, not the other way around. If you expect to hold the asset for its full useful life, a hire purchase with no balloon aligns repayments with usage. If you plan to upgrade or sell within a few years, a chattel mortgage with a balloon preserves cash and provides flexibility at the end of the term.
Call one of our team or book an appointment at a time that works for you to discuss which asset finance structure suits your business and the equipment you are acquiring.
Frequently Asked Questions
What is the difference between chattel mortgage and hire purchase?
A chattel mortgage gives you ownership of the asset from day one, with the lender holding security until the loan is repaid. Under hire purchase, you do not own the asset until the final payment is made, but you can still claim depreciation as if you owned it from the start.
Can I claim depreciation on equipment financed through hire purchase?
Yes, the ATO allows you to claim depreciation on assets financed through hire purchase even though you do not hold legal title until the final payment. The interest portion of each repayment is also deductible.
How does a balloon payment affect my monthly repayments?
A balloon payment reduces your monthly repayment amount by deferring a portion of the principal to the end of the term. It does not reduce the total interest paid unless you settle the balloon early.
When should I consider paying cash for equipment instead of financing it?
Paying cash eliminates interest costs and suits businesses with strong reserves acquiring long-life assets. The trade-off is opportunity cost, as the capital could potentially deliver better returns if deployed elsewhere in the business.
Can I claim the GST on financed equipment immediately?
If you are registered for GST and acquire equipment through chattel mortgage or hire purchase, you can typically claim the GST component in your next business activity statement. Under an operating lease, GST is claimed progressively on each rental payment instead.
