What happens at the end of a novated lease or chattel mortgage term?

With a novated lease, there is a residual value you must deal with – usually by paying it out, refinancing, trading in the car or starting a new lease. With a chattel mortgage, you either own the car outright at the end if there is no balloon, or you pay or refinance the balloon amount. In both cases you need a plan for the final payment before you sign the contract.

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Choosing Between a Novated Lease and Chattel Mortgage for Your Work Car

A clear, decision-ready comparison of novated leases and chattel mortgages for Australian business vehicles, including tax, GST, cashflow and risk so you can choose the right structure this week.

Published 23 July 2026Updated 27 Aug 2026Reviewed 21 Aug 20269 min read

Key Takeaway

This guide explains whether a novated lease or chattel mortgage is better for financing a business vehicle in Australia, focusing on tax, GST, cashflow and risk. Novated leases suit employees using salary packaging with Fringe Benefits Tax, while chattel mortgages suit businesses buying vehicles as assets and claiming GST and depreciation. A worked example compares repayments and deductions, helping small business owners and employees pick a structure that matches their cashflow and tax position this week.

Choosing Between a Novated Lease and Chattel Mortgage for Your Work Car

If you’re deciding between a novated lease and a chattel mortgage for a work car, the core rule is: novated leases suit employees salary‑packaging a car through their employer, while chattel mortgages suit businesses buying a vehicle as a business asset and claiming GST, interest and depreciation. The better option turns on your employment setup, business use percentage, GST status and how you want the cashflow and risk split between household and business.

Here’s how to make a decision you can act on this week.

Tradie comparing novated lease and chattel mortgage options for a work vehicle Clarify whether the car is primarily a business tool or a household vehicle before choosing finance.

Quick comparison: novated lease vs chattel mortgage

At-a-glance differences

Feature	Novated lease	Chattel mortgage
Who it suits	Employees (incl. some owner‑directors)	Sole traders, companies, trusts, contractors
Who owns the car	Usually you (personal) at end of term	Your business from day one
Where repayments come from	Payroll – pre/post‑tax mix	Business account / cashflow
Tax treatment	Salary packaging + FBT rules	GST claim on purchase, interest & depreciation
GST on purchase	Usually financed & claimed via employer	Often 100% upfront GST credit (if registered)*
Running costs bundled?	Often yes (fuel, rego, servicing)	Optional, usually paid separately
Early exit flexibility	Less flexible, fees common	Generally more flexible; asset can be sold or refinanced
Common term	2–5 years	3–7 years
Balloon / residual	Fixed minimum residual (ATO guidelines)	Balloon optional and negotiable

*Subject to normal ATO rules and business use percentage.

One-sentence test

You’re an employee (or PAYG’d director) and want predictable, bundled car costs from your salary → novated lease.
You run a business and the vehicle is primarily for work, and you want full GST and depreciation benefits → chattel mortgage.

How a novated lease works in practice

Structure

A novated lease is a three‑way agreement between you, a leasing company and your employer. The lease is in your name, but your employer agrees to make the lease payments from your salary under a salary packaging arrangement.

Repayments are usually split between pre‑tax and post‑tax salary to manage Fringe Benefits Tax (FBT). The car can be new or used, and many packages bundle fuel, rego, insurance and servicing.

Tax and FBT basics

Your taxable income drops, because part of your pay goes to car costs before PAYG tax.
The car benefit is subject to FBT, usually using the statutory formula method (20% of the base value, regardless of kilometres) under current rules.
To reduce FBT, providers commonly use an employee contribution method (ECM) – you pay part of the running costs from after‑tax salary, which offsets the FBT.

When a novated lease shines

You’re a PAYG employee (or director paid a regular salary) with stable income.
Your employer allows novated leasing and passes on the tax benefit (not all do).
You mainly use the car for personal and commuting, with some work use.
You want simplicity: one deduction from your pay, most costs covered.

Traps for business owners

For small business owners, a novated lease moves the vehicle cost into household cashflow, not business cashflow. That can be sensible if:

The car is largely private anyway; and
You want to keep the business balance sheet cleaner for future borrowing (e.g. for property – see /insights/small-business-owner-home-loan-eligibility-checklist).

But it can be a problem if:

You’re using the vehicle heavily for business, yet bearing most of the cost personally; or
It pushes your personal budget towards mortgage stress, especially with RBA cash rate volatility.

If your home loan is tight, shifting big car costs into your payslip without a plan can make things worse.

How a chattel mortgage works in practice

Structure With a chattel mortgage, your business buys the vehicle and takes out a loan secured against that vehicle. You own the car from settlement; the lender takes a charge over it. Terms are usually 3–7 years, with optional balloons to reduce monthly repayments. This aligns the loan term with the asset life – a point we stress across our guides: using 30‑year home loan debt for short‑life assets concentrates risk and increases interest cost (see /insights/equipment-finance-for-tradies-electricians-plumbers-contractors). ### Tax and GST basics If you’re GST‑registered and the vehicle is…

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Frequently asked questions

No. A novated lease can be tax‑effective for higher‑income employees by reducing taxable salary, but a chattel mortgage often gives stronger GST, interest and depreciation deductions for GST‑registered businesses using the vehicle mainly for work. The better option depends on your business use percentage, GST status and marginal tax rate, not just the headline repayment.

Usually no, because you need an employer to novate the lease and deduct payments from your salary. Some sole traders who operate through a company and pay themselves a wage can access novated leasing, but many are better off using a chattel mortgage or other equipment finance in the business structure instead, where the vehicle is clearly a business asset.

Both can affect borrowing capacity, but in different ways. A novated lease reduces your take‑home pay, so lenders often see it similarly to other personal commitments. A chattel mortgage sits in the business and is assessed alongside your business income and debts. The impact depends on how lenders view your business financials and whether the vehicle helps generate income.

If you are GST‑registered and the car is used in your business, you can usually claim the GST on the purchase price in your next BAS, subject to the car limit and business use percentage. This can help cashflow. The loan itself typically finances the GST‑inclusive price, and the BAS refund reduces the effective cost to the business over time.

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