In short:
Treat a chattel mortgage as a purchase paid for with a loan. The asset goes on the balance sheet at cost less GST and the loan as a liability. The GST credit is claimed in full on one BAS, and each repayment splits into interest, which is an expense, and principal, which pays down the loan.
Key facts
- The business owns it from the purchase: Under a chattel mortgage the buyer takes title when it buys and pays the supplier with the borrowed money. The lender holds security over the asset, not ownership.
- Cash basis gets the full GST credit too: On a cash basis the whole credit falls in the tax period the loan pays for the asset in full. On accruals it's the period the invoice arrives or a payment is made, whichever comes first.
- No tax invoice, no claim yet: The business needs the dealer's tax invoice in hand before it lodges the BAS that claims the credit.
- Repayments stay off the BAS: Lending money is a financial supply, so there's no GST in the interest, and loan repayments aren't reported on the BAS.
- The business claims the depreciation: As the owner, it claims the decline in value, worked out on the price less the GST credit it's entitled to.
When a client buys a truck, a tractor or a piece of equipment on a chattel mortgage, the loan contract and the dealer's tax invoice land on your desk with a purchase, a loan and a GST amount all tangled together. Pull them apart and each has its own home: the asset on the balance sheet, the loan as a liability, the GST on the BAS and the interest in the profit and loss. It's the most common structure on the deals we settle, so here's how each piece is treated under the ATO's guidance, with a worked set of journal entries.
EasyAsset is a finance broker, not a tax adviser. This is how the ATO's published guidance reads, not advice on any client's position, so each business should confirm its own treatment with its accountant or registered tax agent.
A purchase and a loan, not one transaction
The ATO's GST guidance sets out the difference. Under a chattel mortgage, the purchaser takes title from the time of purchase, borrows the price (or part of it) from a lender, and uses that money to pay the supplier. The lender's mortgage is security over the asset if the borrower defaults.
Hire purchase works differently. The financier keeps title until the last instalment is paid or the option to buy is taken up. A lease is different again, because the finance company owns the asset and the business pays to use it. So if the paperwork says chattel mortgage, record two things: the business bought an asset, and the business borrowed money.
The GST credit: all of it, on one BAS
The big question is when the GST comes back. The ATO's GST issues register on hire purchase and chattel mortgage answers it directly:
- On an accruals (non-cash) basis, the purchaser gets the entire GST credit in the tax period the invoice is received or any payment is made, whichever is earlier.
- On a cash basis, the purchaser gets the entire GST credit in the tax period it uses the borrowed funds to pay for the asset in full.
- Either way, the purchaser must hold a tax invoice when it lodges the BAS that claims the credit.
The cash basis point catches people out. The usual cash basis rule spreads a credit across the periods you pay a supplier in instalments. Under a chattel mortgage the supplier isn't paid in instalments. It's paid in full at settlement with the lender's money, and the business's monthly repayments go to the lender, not the supplier.
The normal conditions for a GST credit still apply. The business has to be registered for GST, the price has to include GST, which it will if the seller is registered and charged it, and the asset has to be for the business. If the asset is partly for private use, only the business part of the GST can be claimed. The credit is reported at 1B, GST on purchases.
The repayments: interest is an expense, principal isn't
The ATO lists interest on money borrowed to produce assessable income or to buy income-producing assets among the general operating expenses a business can deduct. If the asset is partly for private use, only the business part of the interest counts.
The rest of each repayment is principal. It pays down the loan and goes against the liability, not the profit and loss. If the loan has a balloon, that's the last of the principal, so it clears the loan and isn't an expense either.
None of the repayment goes on the BAS. The ATO treats lending money as a financial supply, which has no GST in its price, and its Simpler BAS GST bookkeeping guide, written with the Institute of Certified Bookkeepers and the BAS Agent Association Group, lists principal payments on finance and loan interest among the items not reported on the BAS. Code them as out of scope or not reportable.
A few habits keep it clean:
- Take the interest and principal split from the lender's repayment schedule or statements, not from a guess. The interest part shrinks as the balance falls.
- Give any lender fee, such as an establishment fee, its own account rather than lumping it in with interest, so the accountant can see it and decide how it's claimed.
- Some bookkeepers load the loan at the total of all repayments and park the future interest in an unexpired interest account, released month by month. That works too, as long as the net balance agrees with the lender's statement at year end.
Depreciation: the business claims it, on the cost less GST
The ATO's Guide to depreciating assets says only the holder of an asset can claim its decline in value, and in most cases the holder is the legal owner. Under a chattel mortgage that's the business, from the day it buys the asset. The lender has security, not ownership, so the business claims the depreciation.
The cost to depreciate is the price less any GST credit the business is entitled to, plus amounts spent getting it there and ready to use, such as transport and installation. Depreciating the GST-inclusive price when the GST has also been claimed counts the GST twice.
The ATO's page on the prime cost and diminishing value methods sets out the two ways to work it out. Prime cost claims the same amount each year over the asset's effective life. Diminishing value claims more in the early years. The effective life can be the Commissioner's figure for that kind of asset or the business's own estimate, and the ATO may ask how a self-assessed one was worked out. Either way, the deduction is reduced by any private use.
A small business may use the simplified depreciation rules instead. Under those, the business part of an asset that costs less than the write-off limit can be deducted in full in the year it's first used or installed ready for use, and one at or above the limit goes into the small business pool. The limit and the eligibility rules are on the ATO's site, and the accountant should confirm which applies.
Cars: where the car limit comes in
Cars designed mainly to carry passengers have a car limit, which the ATO sets each financial year. On a car priced above it, two things are capped:
- The GST credit is limited to the GST that would be in a car priced at the limit.
- Depreciation is worked out on a cost no higher than the limit.
The ATO's page on purchasing a motor vehicle lists the exceptions to the GST cap, including a commercial vehicle not designed mainly to carry passengers. So a truck on a chattel mortgage isn't caught. A passenger car is.
Worked example: a truck bought on a chattel mortgage
This is an example with round numbers, made up to show the entries. It isn't a real deal, a quote or tax advice.
- A business registered for GST buys a truck from a GST-registered dealer for $110,000, including $10,000 GST, and holds the dealer's tax invoice.
- The truck is used only for the business.
- It borrows the full $110,000 on a chattel mortgage, with no deposit and no balloon, to keep it simple.
- The lender's schedule splits the first repayment of $2,200 into $700 interest and $1,500 principal.
- The business uses the prime cost method and, for round numbers, an effective life of 10 years. That isn't the ATO's figure for any truck. The $100,000 cost is spread evenly, so a full year's depreciation is $10,000.
| When | Account | Debit | Credit |
|---|---|---|---|
| Settlement | Truck at cost (fixed asset) | $100,000 | |
| Settlement | GST paid | $10,000 | |
| Settlement | Chattel mortgage loan (liability) | $110,000 | |
| First repayment | Chattel mortgage loan (liability) | $1,500 | |
| First repayment | Interest expense | $700 | |
| First repayment | Bank | $2,200 | |
| BAS refund received | Bank | $10,000 | |
| BAS refund received | GST paid | $10,000 | |
| End of a full year | Depreciation expense | $10,000 | |
| End of a full year | Accumulated depreciation, truck | $10,000 |
The refund rows assume the truck is the only GST on that BAS. In practice the $10,000 credit nets off against the GST on the business's sales, and the payment or refund clears the GST account as usual. The repayment rows repeat each month with the lender's figures, and none of them is reported on the BAS.
Where each part ends up:
| Part of the deal | Where it goes | What it does for tax |
|---|---|---|
| GST on the purchase | GST account, then 1B on the BAS | Claimed back as a credit, not an expense |
| Price less GST | Balance sheet, fixed assets | Depreciated as the business uses it |
| Interest | Profit and loss, interest expense | Deductible, for the business part |
| Principal and any balloon | Reduces the loan | Not an expense |
| The repayments as a whole | Not reported on the BAS | No GST in them to claim |
Mistakes that show up at year end
- The whole repayment coded to an expense, as if the truck were leased or rented.
- The purchase coded straight to the loan account, so the GST credit never gets claimed.
- GST claimed again on each repayment, when it was already claimed on the purchase.
- Depreciation worked out on the GST-inclusive price.
- The credit claimed before the tax invoice arrived. The ATO says to wait for it, even if that pushes the claim into a later BAS.
- The asset and loan recorded in one entity when the contract names another. The entity that bought it is the one that owns it.
- A passenger car over the car limit claimed in full.
- An asset that's partly for private use claimed as if it were all business.
Where EasyAsset comes in
The tax side is your call, or the client's accountant's. Ours is finding the lender. We work with 60+ lenders, and they don't all look at a deal the same way. The age of the asset, how long the business has been trading and how up to date its lodgements are can all change who will lend and on what terms.
Bookkeepers often hold the documents a lender asks for. Depending on the lender and the amount, that can mean recent financials, BAS statements and a list of the client's existing finance. Having them ready early saves going back and forth once a client has found the truck or machine they want.
Client buying a truck on a chattel mortgage? Start a truck finance quote with EasyAsset here.
The broker's view
The question bookkeepers ask me most is where the GST goes. On a chattel mortgage the business owns the truck from settlement, so the full credit comes back on the BAS for that period, not bit by bit through the repayments. If a client's quarter is about to close, tell me early, because the dealer's tax invoice and the settlement date decide which BAS it lands in.
Frequently asked questions
Can you claim the full GST upfront on a chattel mortgage?
Yes, if the business is registered for GST, holds the dealer's tax invoice and uses the asset for the business. The ATO's guidance gives the entire credit in one tax period, on a cash or accruals basis. Only the business part can be claimed if there's private use, and a passenger car above the car limit is capped.
What's the journal entry for a chattel mortgage at settlement?
Debit the asset at its price less GST, debit GST paid with the GST on the tax invoice, and credit the chattel mortgage loan with the amount borrowed. If the business paid a deposit, credit the bank account with that too, so the entry balances.
Are chattel mortgage repayments reported on the BAS?
No. Lending money is a financial supply with no GST in it, and the ATO's Simpler BAS GST bookkeeping guide lists principal payments on finance and loan interest as not reported on the BAS. The GST was claimed on the purchase itself.
Is the whole chattel mortgage repayment tax deductible?
No. Only the interest is an expense, for the business part. The principal and any balloon pay down the loan. The business claims depreciation on the asset instead.
Who claims the depreciation, the business or the lender?
The business. Under a chattel mortgage it takes title when it buys the asset, and the ATO says the holder, usually the legal owner, is the one who claims the decline in value. The lender only holds security over it.
