Hire purchase vs chattel mortgage vs lease: which one actually suits your purchase

The short answer

If you want to claim depreciation, in most cases you need a chattel mortgage or hire purchase. Both put you in the position of holding the asset for tax purposes, and both work with the instant asset write-off. The chattel mortgage is the more common of the two in Australia today.

Use a finance leaseif you'd rather not own the asset, want the lowest monthly payment, or plan to hand it back and upgrade. Just understand that you're normally giving up depreciation deductions — and with them, the write-off.

The three structures in one line each

Side by side

*The $20,000 instant asset write-off for 2026–27 is announced but not yet law. See where the instant asset write-off fits.

Hire purchase vs chattel mortgage: what actually differs now

This is the comparison people search for most, and the honest answer is: less than you'd think.

Before 1 July 2012, hire purchase was split for GST purposes — but only where the credit charge was both separately identified and disclosed to you. Where it was, that credit component was input taxed, and a business accounting for GST on a cash basis could only claim the GST back gradually across the term. A chattel mortgage let you claim the whole lot far sooner. For a cash-basis business buying a $66,000 excavator, that was a $6,000 cash flow difference arriving now rather than dribbling in over five years. Genuinely decisive.

Then the law changed. Hire purchase agreements entered into on or after 1 July 2012 are fully taxable regardless of whether the interest is separately disclosed, and a cash-basis purchaser claims the input tax credit as though they were on accruals. The timing advantage evaporated.

So what's left?

GST on the interest

This one is subtle and it cuts against hire purchase. Under a chattel mortgage the interest is an input-taxed financial supply — no GST on it at all. Under post-2012 hire purchase, GST applies to principal andinterest, and you claim a credit for it. If you're fully creditable, that washes out. If you're not — private use, or activities that are partly input-taxed — hire purchase leaves you with unrecoverable GST on the interest that a chattel mortgage never generates in the first place.

One trap with hire purchase: the credit is one eleventh of the principal and interest, excludingfees and charges that don't carry GST, like stamp duty and registration. Taking one eleventh of the total financed amount over-claims.

Title timing

Under a chattel mortgage you own the asset immediately, which matters if you need to modify it, on-sell it mid-term, or use it as security elsewhere. Under hire purchase you're waiting until the final payment.

Documentation and payout

Chattel mortgage payouts and early terminations are generally simpler. Hire purchase agreements sometimes carry termination formulas that make early exit more expensive. Read that clause before you sign.

Availability

Since 2012 most Australian lenders have shifted their equipment and vehicle books toward chattel mortgages. Hire purchase persists in pockets — some agricultural equipment and fleet arrangements — usually because that's how the financier's product set is built, not because it's better for you.

For a fully creditable business buying a straightforward piece of equipment, the two land in much the same place. If a lender offers hire purchase at a better rate, that's not a worse deal. If you have private use or restricted GST recovery, the chattel mortgage has a small structural edge.

Chattel mortgage vs finance lease: this is where the real fork is

Forget hire purchase for a moment. The decision that actually changes your tax position is chattel mortgage versus lease.

The test that matters isn't strictly ownership — it's who holdsthe asset for tax purposes. Under a chattel mortgage that's you, so you depreciate it and deduct the interest. Under a finance lease it's normally the lessor, so you deduct the lease payments instead and depreciate nothing.

That has a consequence people miss until their accountant points it out: a leased asset can't be instantly written off.The write-off is a depreciation concession, and if you're not the holder you have no decline in value to claim. If you're buying a $19,000 machine in a year where you'd like the full deduction now, leasing it hands that deduction to the lessor.

Two cases where a lessee is the holder

These are exceptions to the depreciation rule, not shortcuts to the instant asset write-off. They behave differently from each other, so take them one at a time.

Cars above the car limit.Where you lease a car costing more than the car limit for the year the lease is granted, and it isn't a genuine short-term hire, the arrangement is recharacterised as a notional sale and loan. The lessee is generally treated as the holder, can claim decline in value capped at that car limit, and the finance charge component may be deductible. Any deduction has to be reduced for non-business use.

Assets fixed to your land. A leased depreciating asset affixed to land you hold can also make you the holder, entitled to decline in value on your own cost.

The car case can never produce a write-off. A car caught by the luxury car lease rules costs more than the applicable car limit — $69,883 for 2026–27 — and the write-off threshold is $20,000. The two can't overlap. Being able to claim decline in value on a leased car is not the same thing as writing it off immediately, and that distinction gets blurred a lot.

The fixed-to-land case is less clear cut. There your claim is based on your own cost of holding the asset — typically what it cost you to install it, not the lease payments — which can be a far smaller figure. Whether that cost could be written off immediately depends on your circumstances. Worth asking your accountant rather than assuming it either way.

Leasing still makes sense in the right situation. Lower monthly payments, because you're financing the depreciation rather than the whole asset. Predictable upgrade cycles, which is why it's common for IT equipment and light commercial fleets. And no residual asset to dispose of when you're done.

But if the plan is to keep the asset, a chattel mortgage is almost always the better outcome.

Where the instant asset write-off fits

Status, as at 16 August 2026: this is not yet law.

The $20,000 instant asset write-off was announced in the 2026–27 Budget on 12 May 2026 as a permanent measure for businesses with aggregated turnover under $10 million, applying from 1 July 2026. The enabling legislation — the Treasury Laws Amendment (Tax Reform No. 2) Bill 2026 — was introduced on 25 June 2026 and referred to the Senate Economics Legislation Committee the same day. The committee reported on 13 August 2026 and recommended the Bill be passed; Coalition senators additionally recommended lifting the threshold to $50,000. Full committee-report briefing. The Bill has not passed either house, and the ATO continues to list the measure as not yet law.

That's worth taking seriously rather than treating as a formality. As the Parliamentary Library's Bills Digest puts it, absent the amendment the threshold reverts to $1,000 from 1 July 2026. That's a twentyfold difference landing on the same purchase decision. Don't commit on the strength of the $20,000 figure without checking with your accountant where the legislation actually stands on the day you sign.

If it passes as announced:

• —The $20,000 limit applies per asset, so several assets can be written off in the same year.
• —Assets costing $20,000 or more go into the small business simplified depreciation pool: 15% in the first year, 30% each year after.
• —Pool balances under $20,000 at year end can be written off in full.

One detail worth knowing, because most comparisons skip it: if you're registered for GST and can claim a full credit on the purchase, the $20,000 test applies to the GST-exclusive cost. That means you can spend up to about $21,999 including GST and still come in under the threshold. The catch is the “full credit” part — if the asset has private use or relates to input-taxed activities, you only exclude the credit you can actually claim, and the effective ceiling drops. See our instant asset write-off guide for the live status.

The car limit trap

If the asset is a car, there's a ceiling on what you can depreciate regardless of what you paid.

For the 2026–27 income year the car limit is $69,883. Spend more and you still only depreciate up to the limit. The GST credit is capped in the same way, at one eleventh of the limit — a maximum of $6,353.

So a $90,000 ute financed under a chattel mortgage — assuming it counts as a car for these purposes — doesn't give you a $90,000 depreciable asset. It gives you $69,883 of depreciable cost and $6,353 of GST credit. The excess isn't depreciable.

That “assuming it counts as a car” qualifier does a lot of work. For income tax, a car is designed to carry a load under one tonne and fewer than nine passengers — so plenty of heavier utes and light trucks sit outside the limit entirely, as do motorcycles. Be aware the GST test isn't identical; the GST rules carve out further categories including trading stock, emergency vehicles, motor homes, and commercial vehicles not principally designed to carry passengers. Five minutes with your accountant before you commit is cheap insurance.

A worked comparison

Say you're buying a $66,000 excavator, including GST. Ex-GST cost is $60,000.

Over five years the chattel mortgage and hire purchase land in much the same place. The lease is a different shape entirely: cheaper each month, no asset at the end.

How to choose

FAQ

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