Chattel mortgage vs novated lease — the short answer: a chattel mortgage is a business loan that gives your business outright ownership of the vehicle from day one. A novated lease, on the other hand, is a three-way salary packaging arrangement between an employee, their employer and a financier. Sole traders and ABN holders without an employing entity can only use a chattel mortgage. Company directors and employees paid a wage, however, can choose between the two — it depends on how they want the tax and ownership outcomes to fall.
Chattel Mortgage vs Novated Lease at a Glance
| Feature | Chattel Mortgage | Novated Lease |
|---|---|---|
| Who it’s for | Sole traders, ABN holders, companies | PAYG employees, including directors paid a wage by their own company |
| Vehicle ownership | Business owns the vehicle from settlement | Financier owns the vehicle; employee is the lessee |
| GST treatment | Eligible businesses can typically claim GST upfront, up to the car limit cap, in one BAS period | You claim GST credits progressively on each lease payment, with no car limit cap |
| Tax treatment | Interest and depreciation may be deductible for the business-use portion | No direct deduction to the employee; payments come from pre-tax and post-tax salary |
| FBT exposure | None — it’s a business asset, not a fringe benefit | Subject to Fringe Benefits Tax unless the vehicle qualifies for the EV exemption or FBT is offset via employee contributions |
| Balance sheet effect | Asset and loan sit on the business balance sheet | Off-balance-sheet for the business; reduces the employee’s take-home pay instead |
| End of term | Vehicle is fully owned once the loan (including any balloon) is paid out | Pay out the residual to own it, re-lease, or return the vehicle |
What Is a Chattel Mortgage
A chattel mortgage is a business car loan: the lender advances the funds, your business owns the vehicle outright from day one, and the lender registers a security interest over it until the loan is repaid. Eligible businesses can generally claim the GST on the purchase price upfront in a single BAS period. In addition, interest plus depreciation may be tax-deductible for the business-use portion. Read the full breakdown in our guide to what a chattel mortgage is.
What Is a Novated Lease
A novated lease is a three-way agreement between an employee, their employer and a financier. The employee leases the vehicle, and the employer takes on the lease payments through a salary packaging arrangement. This usually draws on a mix of the employee’s pre-tax and post-tax salary. A novated lease relies on an employer being part of the agreement, so it’s generally only available to PAYG employees — including a company director who pays themselves a wage through their own company. A sole trader with no employing entity can’t access this structure, since there’s no employer to novate the lease to.
A car provided under a novated lease counts as a car fringe benefit. So it can trigger Fringe Benefits Tax, unless the vehicle is exempt or you manage the FBT down through employee contributions. Eligible battery electric and hydrogen fuel-cell vehicles can currently qualify for a full FBT exemption, provided they’re priced under the luxury car tax threshold for fuel-efficient vehicles. That’s why novated leases are often promoted alongside electric vehicles. Plug-in hybrids no longer qualify for this exemption on new arrangements. FBT rules are detailed and change over time, so confirm current thresholds and eligibility with your accountant or a novated lease provider before committing.
Key Differences That Usually Decide It
- No employer, no novated lease. If you’re a sole trader or your business has no PAYG payroll, a chattel mortgage is generally your only option between the two.
- Ownership matters. A chattel mortgage puts the vehicle on your business’s books as an asset from day one. A novated lease, by contrast, keeps it off your business balance sheet, with the financier retaining ownership.
- GST timing is different. A chattel mortgage can allow a single upfront GST claim, capped at the car limit. With a novated lease, instead, you claim GST credits progressively as you make each lease payment, without that cap.
- FBT only applies to novated leases. A chattel mortgage vehicle used for business isn’t a fringe benefit. A novated lease, however, can attract FBT — unless it’s an exempt eligible EV or the FBT is offset through employee contributions.
- Flexibility to change vehicles differs too. Novated leases are often easier to end early or roll into a new lease. A chattel mortgage loan, on the other hand, generally runs to term or needs refinancing to exit early.
Every business’s situation is different. So the right choice depends on your structure, how you’ll use the vehicle, and your accountant’s advice on the tax outcome. For a comparison of chattel mortgages against standard car loans, see chattel mortgage vs car loan, and for chattel mortgage vs a personal loan, see chattel mortgage vs personal loan.
Frequently Asked Questions
Can a sole trader get a novated lease?
Generally no. A novated lease requires an employer to take on the lease payments. So it’s mainly available to PAYG employees, including company directors paid a wage by their own company. Sole traders without an employing entity typically use a chattel mortgage instead.
Is a novated lease cheaper than a chattel mortgage?
It depends on your circumstances. A novated lease on an eligible electric vehicle can be very tax-effective, thanks to the FBT exemption. A chattel mortgage, on the other hand, can suit ABN holders who want outright ownership and an upfront GST claim. Compare the net cost with your accountant rather than relying on the headline rate alone.
Can I get a Fringe Benefits Tax exemption on a novated lease?
Eligible battery electric and hydrogen fuel-cell vehicles can currently qualify for an FBT exemption on a novated lease, provided they’re priced under the luxury car tax threshold for fuel-efficient vehicles. Plug-in hybrids no longer qualify for this exemption on new arrangements. Confirm current eligibility with your accountant, as these rules can change.
Which option lets me claim GST upfront?
A chattel mortgage can allow eligible businesses to claim the GST on the purchase price upfront in a single BAS period. That’s capped at the GST car limit. With a novated lease, you instead claim GST credits progressively as you make each lease payment.
Can I switch between a chattel mortgage and a novated lease later?
Yes — businesses commonly use different finance structures for different vehicles, or as circumstances change. For example, you might move from a sole trader chattel mortgage to a novated lease once you incorporate and start paying yourself a wage. We assess each new vehicle and finance arrangement on its own merits.
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