What Is a Chattel Mortgage?

A Chattel Mortgage is a financial instrument in which the financier takes security over chattels (movable articles of property) and are held by the financier to enable recourse should there occur a default by the borrower. From date of purchase, the borrower has title in the chattel and finances the purchase price of the chattel by way of a loan and applies the borrowed funds as payment to the supplier of the chattel.

The financier takes a chattel mortgage over the asset as security for the loan by registering a fixed and floating charge with the Australian Securities & Investments Commission (ASIC). After contractual commitments to the loan are completed, the charge is removed giving the borrower clear title to the asset.

The Financial Mechanics of the Chattel Mortgage

The financier enters into a financial contract with the borrower specifying terms and conditions which include a fixed monthly repayment for the period of the contract. The monthly repayment consists of both principal and interest and transaction charge components. Only the principal component will be subject to GST.

At the expiry of the financial contract, the borrower generally has an option to either pay a final residual balloon value and remove the floating charge on the vehicle, or alternatively may use the vehicle as a means of trade-in or extend the financial contract by re-financing the residual value.

Advantages of the Chattel Mortgage

• Fixed repayment structure is known at inception, that is - there are fixed terms that can range from two years (24 months) to five years (60 months); fixed interest rate; fixed monthly rentals and a fixed final residual value.
• The Chattel Mortgage does not necessarily have to be for the full on road drive away price of the vehicle. An upfront deposit and/or cash trade-in may be applied as an offset to determine the net amount borrowed under the Chattel Mortgage.
• The amount financed includes the GST component in the vehicle’s purchase price and allows the borrower to claim the GST input tax credits to the extent that the vehicle is used for business purposes.
• The Chattel Mortgage can be structured to make advanced payments during the term period to assist in timing issues that may result in increased tax deductibility and/or help with cash flow constraints.

Chattel Mortgage may be suitable for:

Companies, Partnerships, Sole Traders and Business Professionals, where the vehicle is essentially used for income producing purposes and GST is accounted for in the entity’s Business Activity Statement (BAS) under an accruals or cash method. Should the GST be accounted for on a cash basis, the borrower has entitlement to the entire input tax credits in the tax period of the Business Activity Statement (BAS), the period in which the borrower applies the borrowed funds to make full payment of the chattel acquisition.

Points to note and consider:

• The principal component of the fixed monthly payment and residual balloon value will include a GST charge. If the client is registered for GST, then the GST amounts can be claimed back on lodgement of their Business Activity Statement (BAS).
• The total interest charges under the Chattel Mortgage contract amount financed together with depreciation may be claimed as a tax deduction in the relevant tax period, subject to the Depreciation Cost limits. If the total amount financed is below the Depreciation Cost Limit, the total interest charge and depreciation is available as a tax deduction. Should the amount financed exceed the Depreciation Cost Limit, total interest charges are available as a tax deduction but depreciation would be limited to the Depreciation Cost Limit.