Equipment Finance vs Leasing: Which Is Better for Your Business?
When your business needs equipment — whether it is a CNC machine, commercial vehicle, medical device or IT infrastructure — you have several financing options. The right choice depends on your cash flow, tax position, how long you plan to keep the asset and whether you want to own it at the end. This guide compares the four main structures available in Australia: chattel mortgage, hire purchase, operating lease and finance lease.
- Chattel mortgage provides immediate ownership and is the most popular option for GST-registered businesses
- Hire purchase transfers ownership at the end of the term after all payments are made
- Operating leases keep assets off your balance sheet and transfer residual value risk
- Finance leases are similar to operating leases but with an option to purchase at the end
- Your ideal choice depends on your tax position, cash flow needs and how quickly the asset depreciates
The Four Main Options at a Glance
| Feature | Chattel Mortgage | Hire Purchase | Operating Lease | Finance Lease |
|---|---|---|---|---|
| Ownership | Yours from day one | Yours at end of term | Lessor's | Lessor's (option to buy) |
| GST on purchase | Claim upfront | Spread over term | N/A (included in payments) | N/A (included in payments) |
| Tax deductions | Interest + depreciation | Interest + depreciation | Full lease payment | Full lease payment |
| Instant asset write-off | Yes | Yes (at end) | No | No |
| On balance sheet | Yes (asset + liability) | Yes (asset + liability) | No (off balance sheet) | Yes (under AASB 16) |
| Balloon/residual | Optional | Optional | Residual (lessor's risk) | Residual (your option) |
| Best for | GST-registered businesses wanting ownership | Businesses wanting ownership with lower upfront costs | Technology and rapidly depreciating assets | Long-term assets where you want the purchase option |
Chattel Mortgage
A chattel mortgage is a loan secured against a movable asset (the "chattel"). You take ownership of the equipment immediately and the lender holds a mortgage over it as security. Once you have made all the repayments, the mortgage is discharged and you own the asset free and clear.
Tax treatment: If your business is registered for GST, you can claim the full GST credit on the purchase price in your next BAS. You can also claim the interest on repayments as a tax deduction and depreciate the asset over its effective life. If the asset qualifies for the instant asset write-off, you may be able to deduct the full cost in the year of purchase.
When to choose: A chattel mortgage is generally the best option if you are GST-registered, want to own the asset, plan to keep it beyond the finance term, and want to maximise tax deductions including the instant asset write-off.
Hire Purchase
With a hire purchase, the finance company buys the equipment and "hires" it to you. You make regular payments over the agreed term, and ownership transfers to you once the final payment (including any residual) is made. The key difference from a chattel mortgage is that ownership does not transfer until the end.
Tax treatment: GST is included in each payment and claimed progressively through your BAS, rather than as one upfront claim. You can deduct interest and depreciation. The hire purchase is recorded as an asset and liability on your balance sheet from day one, even though legal ownership remains with the finance company until the end.
When to choose: Hire purchase works well for businesses that want to own the asset eventually but prefer not to make a large GST-inclusive upfront payment. It is also suitable for non-GST-registered businesses (sole traders under the GST threshold) because the GST payment pattern is less impactful.
Operating Lease
An operating lease is essentially a long-term rental agreement. The lessor owns the equipment and bears the residual value risk. You make regular lease payments for the use of the asset, and at the end of the term, you return it (or negotiate to purchase it at fair market value or extend the lease).
Tax treatment: The entire lease payment is a fully tax-deductible operating expense. You cannot claim depreciation because you do not own the asset. Historically, operating leases stayed off balance sheet, but under the new AASB 16 standard, most leases must now be recognised on the balance sheet for reporting entities. Smaller businesses using simplified reporting may still keep them off balance sheet.
When to choose: Operating leases are ideal for equipment that depreciates rapidly (technology, IT infrastructure) or equipment you only need for a specific period. They are also attractive if you want predictable cash flow with no residual value risk.
Finance Lease
A finance lease sits between an operating lease and a hire purchase. The lessor owns the equipment, but the lease term typically covers most of the asset's useful life. At the end, there is a residual value that you can pay to take ownership, or you can return the equipment.
Tax treatment: Lease payments are tax-deductible. Under AASB 16, finance leases are recognised on the balance sheet with both an asset (right-of-use) and a liability (lease obligation). GST is included in lease payments and claimed through your BAS with each payment.
When to choose: A finance lease works well when you think you will probably want to own the asset at the end but want to defer that decision. It provides flexibility that a chattel mortgage does not — if the equipment becomes obsolete, you can return it at the end of the lease.
Making the Right Choice for Your Business
There is no single "best" option — the right structure depends on your specific circumstances. Consider these questions:
- Do you want to own the asset? If yes, lean towards chattel mortgage or hire purchase.
- Are you GST-registered? If yes, a chattel mortgage lets you claim the full GST credit upfront, improving cash flow.
- How quickly does the asset depreciate? For rapidly depreciating assets, an operating lease transfers the residual value risk to the lessor.
- Is the instant asset write-off important to you? Only chattel mortgage and hire purchase qualify.
- Do you want to keep the asset off your balance sheet? An operating lease may achieve this for smaller businesses not subject to AASB 16.
- Tax implications vary significantly between these structures and depend on your business entity type, turnover, and overall tax position.
- This guide provides general information only. Always consult your accountant or tax adviser before making a financing decision.
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees, or other loan amounts might result in a different comparison rate. Comparison rates are based on a secured loan of $30,000 over 5 years for vehicle finance and $50,000 over 5 years for equipment finance, as required under the National Credit Code.