Chattel Mortgages: A Simple Guide to Accounting and Taxes

Chattel mortgages are valuable tools for businesses to acquire movable assets like vehicles and equipment. This guide explains how chattel mortgages work, outlines their accounting practices, and clarifies the tax rules involved.

What's a Chattel Mortgage? A Chattel Mortgage is a financial tool facilitating the acquisition of movable assets. In essence, it operates as follows: a lender, typically a bank, extends funds to a borrower, enabling them to purchase a movable asset. This asset serves as collateral for the loan.

There are primarily two classifications of Chattel Mortgages:

  • Legal Chattel Mortgage: the lender keeps legal ownership of the item until the borrower finishes paying off the loan.
  • Equitable Chattel Mortgage: this is more common, gives legal ownership of the item to the borrower. However, the lender still has a claim over the item, meaning they can take it back if the borrower doesn't repay the loan.

For the purposes of this article, we focus solely on the equitable chattel mortgage. From an income tax perspective, the borrower assumes ownership and depreciation rights over the asset. Depreciation can be claimed based on the asset's declining value.

Regarding Goods and Services Tax (GST), if you operate on an accrual basis, GST can be claimed immediately upon receipt of the invoice, akin to a hire purchase agreement. Conversely, if you employ a cash basis, GST is claimable upon borrowing funds to pay for the asset in its entirety. Consider the scenario of purchasing a car through a chattel mortgage: under the accrual accounting method, GST can be promptly claimed upon receipt of the invoice. Conversely, utilising the cash accounting method enables GST claiming on the day of loan initiation.

If the car is given to employees, they'll need to pay Fringe Benefits Tax (FBT) on the personal use portion. This emphasises why it's crucial to grasp the wider tax implications of chattel mortgages, particularly when it comes to employee benefits. In conclusion, chattel mortgages offer businesses a flexible and efficient means of acquiring essential assets. By comprehending the accounting treatments and tax ramifications, businesses can navigate these financial instruments adeptly, optimising their financial strategies and ensuring regulatory compliance.

Disclaimer: The material and contents provided in this blog are general guide and informative in nature only. They are not intended to be seen as legal and tax advice. If expert assistance is required, you should seek your own advice for any legal, tax or investment issues raised in your affairs.