Equipment finance and leasing explained

Equipment finance is lending built around a specific asset: a ute, a truck, a tractor, a forklift, medical equipment, computers or a shop fit-out. The asset is the security, so the lender’s risk is tied to what the asset is worth and how readily it can be resold, rather than only to the business’s balance sheet. That is why equipment finance is usually quicker to arrange and cheaper than an unsecured business loan, and why rates for new, readily resold assets such as vehicles are lower than for specialised or second-hand equipment.

Equipment finance comes in four main structures, and the differences between them are about ownership: who owns the asset during the term, whether ownership passes at the end, and how that changes the treatment of GST, depreciation and the final payment. Australian banks publish these structures under the Consumer Data Right as business loans (chattel mortgages, equipment loans and, at most banks, commercial hire purchase) and as leases (finance leases, operating leases, rental agreements and novated leases).

A chattel mortgage is a loan to buy an asset, with a mortgage over the asset as security. The business owns the asset from the day it is bought, and the lender’s mortgage is removed once the loan is repaid.

Because the business owns the asset, it is the business that claims depreciation and the interest on the loan as deductions, to the extent the asset is used for business. A business registered for GST claims the GST included in the purchase price as an input tax credit on its next BAS, to the extent of business use and, for a car, up to one-eleventh of the car limit, which can return a meaningful amount of cash early in the loan. Chattel mortgages are the most common structure for business vehicles.

A chattel mortgage can include a balloon payment, a lump sum left owing at the end of the term. A balloon lowers the regular repayments, but the business still owes it at the end and pays interest on it throughout the term. At the end the balloon is paid, refinanced or met by selling the asset.

Under commercial hire purchase, the financier buys the asset and hires it to the business for a set term. The business makes regular payments and takes ownership when the final payment is made. During the term the financier remains the legal owner.

For tax purposes a hire purchase is generally treated as a sale financed by a loan, so the business claims depreciation and the interest component of the payments, much as under a chattel mortgage. Since 1 July 2012, a business registered for GST can claim the GST on a hire purchase agreement upfront rather than as each instalment is paid, whether it accounts for GST on a cash or accruals basis. That change removed most of the difference between hire purchase and chattel mortgage for GST purposes, and the two now differ mainly in when legal ownership passes.

Under a finance lease, the financier buys the asset and leases it to the business for a fixed term, with a residual value set at the start. The financier owns the asset throughout. At the end of the term the business may be able to buy the asset from the financier for the residual, or can refinance the residual or trade the asset in, with any shortfall between its value and the residual payable by the business.

The lease payments are generally deductible to the extent the asset is used for business, and the financier, as owner, claims depreciation. The exception is a lease of a car costing more than the car limit, which the ATO treats as a notional sale and loan: the business claims the car’s decline in value, capped at the car limit, and the finance charge component instead of the lease payments. GST is charged on each lease payment rather than on the purchase price, so a GST-registered business claims credits progressively with each payment instead of upfront. Finance leases suit businesses that prefer a fixed periodic expense to an upfront GST claim and owning the asset during the term.

An operating lease is closer to a long-term rental. The financier owns the asset, the business uses it for an agreed term, and the asset goes back to the financier at the end. There is no residual for the business to pay, and the financier carries the risk of what the asset is worth when it comes back.

Operating leases suit assets that are replaced on a regular cycle or that lose value quickly, such as computers, office equipment, and fleet vehicles changed every few years. Some operating leases bundle in maintenance, servicing and replacement. Rental agreements, sometimes called finance rentals, work in a similar way for smaller items such as IT and point-of-sale equipment. The rental or lease payments are generally deductible to the extent of business use, and GST is charged on each payment.

A novated lease is a car lease for an employee rather than a business, though it is published by banks alongside business leases. The employee leases a car, and the employer agrees to make the lease payments from the employee’s salary package. The three parties, the employee, the employer and the financier, sign an agreement that transfers the payment obligation to the employer while the employee remains employed there.

Payments, and often running costs such as fuel, registration, insurance and servicing, come out of the employee’s salary package, mostly from pre-tax salary, often with a post-tax employee contribution that reduces the taxable value of the benefit, and fringe benefits tax rules decide how much of the benefit is taxed. Since 1 July 2022, eligible zero and low emission cars below the luxury car tax threshold for fuel-efficient vehicles have been exempt from fringe benefits tax, which has made novated leases on electric cars particularly common. Plug-in hybrids stopped qualifying from 1 April 2025, except where the car was already provided under the exemption before that date and a financially binding commitment to keep providing it continues. In May 2026 the government announced plans to narrow the exemption: from 1 April 2027 the full exemption would apply only to electric cars costing up to $75,000, with a 25% discount on the tax for those above that and below the threshold, and from 1 April 2029 eligible electric cars would receive the 25% discount only. It said existing leases would not be affected. The ATO notes the changes are not yet law.

A novated lease ends with a residual value set by reference to an ATO schedule of minimum residuals, which falls as the lease term gets longer. If the employee leaves the employer, the lease reverts to the employee, who then makes the payments personally.

Equipment finance rates depend on the asset type, its age, the term, the size of any balloon and the business’s financial position. New vehicles and mainstream equipment generally attract lower rates. Older assets, specialised machinery and younger businesses pay more. Rates are usually fixed for the term.

The fees on equipment finance are generally an establishment or documentation fee, a monthly account fee on some products, and a PPSR registration cost. The lender registers its interest in the asset on the Personal Property Securities Register so it is protected if the business sells the asset or becomes insolvent. Paying out the agreement early can carry an early termination fee or a payout calculated to recover some of the lender’s lost interest, particularly on fixed-rate contracts.

The structure decides the ownership, tax and end-of-term outcome, and the rate and fees decide the cost:

1. The structure: chattel mortgage or hire purchase for a business that wants to own the asset, finance lease for a fixed periodic expense, with the possibility of buying the asset at the end, operating lease or rental for an asset that will be handed back and replaced.
2. The interest rate, fixed for the term on most products, and how it changes with the asset’s age and type.
3. Any balloon or residual, its size, and the plan for meeting it at the end.
4. Establishment, account and early payout fees.
5. The GST and tax position, which depends on the business’s GST registration, accounting basis and business use percentage.

Current equipment, vehicle and asset finance products are listed on the Equipment Finance page. Business owners buying a vehicle for mostly personal use, rather than for the business, are generally looking at a personal car loan instead, and those are compared on the car loans hub. Larger business borrowing is covered in the guide to business loans and overdrafts.