Novated Lease vs Chattel Mortgage: Which Is Better for Your Business?

You've decided the business needs another vehicle. Then your accountant mentions a novated lease, the dealer mentions a chattel mortgage, and the two of them are describing arrangements that barely resemble each other. What confuses people is that only one of the two is usually available to you, and which one it is depends less on the car than on how you pay yourself.

Start with who employs you, not with the tax

A chattel mortgage is a business loan. Your business borrows, buys the vehicle outright and owns it from the day of purchase, and the lender registers a security interest over it until the loan is repaid. You need an ABN and you need the vehicle working in the business.

A novated lease is a three-way arrangement between you, your employer and a financier. The financier owns the car, your employer takes on the lease obligations, and the payments come out of your salary package. The ATO describes car leasing as commonly done through a novated lease in a salary sacrifice arrangement.

That distinction settles most of the question before tax enters it. If you are a sole trader or a partner in a partnership, you have no employer, so a novated lease is off the table and a chattel mortgage is the usual route. If you run a company or a trust and draw a salary as an employee of it, both are genuinely open to you.

What the business gets from a chattel mortgage

Ownership brings the deductions with it. The business claims the interest and the decline in value of the vehicle, and the asset sits on your balance sheet.

Two caps are worth knowing before you sign anything. The ATO set the car limit for 2026-27 at $69,883, and that is the maximum value you can use to calculate depreciation on a vehicle first used or leased in that income year. The GST credit is capped the same way. Buy a car for more than the car limit and the most GST you can generally claim is one-eleventh of it, which the ATO puts at $6,353 for 2026-27.

There is a worthwhile exception. A commercial vehicle that is not designed for the principal purpose of carrying passengers falls outside that GST cap, so a work ute or a truck can attract the full credit even above the car limit. Motor homes, emergency vehicles and cars held solely as trading stock sit outside it too.

The $20,000 instant asset write-off became permanent from 1 July 2026 for businesses with aggregated turnover under $10 million, and it rarely does much for a vehicle. Very little that is road-registered comes in under $20,000, so a car bought by a small business using the simplified depreciation rules goes into the general small business pool and depreciates at 15% in the first income year and 30% each year after that.

What the employee gets from a novated lease

The appeal is that the payments come out of a salary package rather than out of after-tax income, and the running costs usually travel with them. The cost sits in fringe benefits tax.

A car provided under a novated lease is generally a car fringe benefit, and the employer pays FBT on its taxable value. Under the statutory formula method that value is the base value of the car multiplied by a statutory percentage of 20%, pro-rated for the days the car was available for private use, less any employee contribution. The ATO has the FBT rate at 47% for the FBT years ending 31 March 2023 through 31 March 2027, and the FBT year itself runs from 1 April to 31 March.

That last term, the employee contribution, is what the industry calls the employee contribution method. Post-tax payments you make reduce the taxable value dollar for dollar, which is why most novated leases are structured to split the payments between pre-tax and post-tax money.

The ATO is specific about one more thing: the lease has to be a bona fide lease. Dealings must be at arm's length and on commercial terms, the residual value has to reflect a reasonable estimate of market value and cannot fall below the published minimums, and there can be no agreement at the outset that you will buy the car at the end. Get that wrong and the arrangement becomes a property or residual fringe benefit, which usually means more FBT rather than less.

The comparison at a glance

The GST row is the one most owners miss. The ATO states plainly that the credit on lease payments is not limited to one-eleventh of the car limit, and on an expensive vehicle that difference favours the lease.

Where an electric car changes the answer

This is the point where the two structures stop being close. Private use of an eligible electric car provided under a salary packaging arrangement is exempt from FBT, and so is the electricity used to charge it, along with registration, insurance and maintenance.

The conditions are narrow. As at the ATO's guidance of 1 April 2026, the car must be a battery electric or hydrogen fuel cell vehicle designed to carry a load under one tonne and fewer than nine people, it must have been first held and used on or after 1 July 2022, and luxury car tax must never have been payable on it. That last test ties the exemption to the luxury car tax threshold for fuel-efficient vehicles, which the ATO set at $91,661 for 2026-27. Plug-in hybrids have not counted as eligible vehicles since 1 April 2025, although some existing arrangements continue. The benefit is still reportable even when no FBT is payable.

Take that exemption away and the novated lease advantage narrows a long way, which matters because the settings are moving. Treasury released exposure draft legislation on 11 September 2026 that includes changes to the fringe benefits tax treatment of electric vehicles, with consultation open until 28 September 2026. It is a draft, not law, so the ATO rules above are the ones that apply today. It is also a good reason to confirm the treatment before you commit rather than after.

How to make the call

Work out whether a novated lease is even available. No employer, no novated lease. A company or trust that pays you a salary can novate a lease; a sole trader cannot.

Compare total cost with the tax stripped out first. Take the drive-away price, the finance cost over the full term and the residual obligation on the lease side, then apply the tax treatment to each. A structure that wins on tax and loses on price is not a win.

Match the term to how long you will keep the vehicle. A residual you have to meet in three years on a car you intend to run for eight is a refinancing decision you have signed up for in advance.

Ask your accountant about the tax, not the dealer. The outcome turns on your business structure, your GST registration and the business-use percentage you can actually substantiate with records.

What to do next

Price the vehicle before you price the finance, because the drive-away figure is the part you control. Then put the two structures side by side on total cost over the full term, residual included. If an electric car is on the shortlist, check its retail price against the luxury car tax threshold for fuel-efficient vehicles before anything else, because that single test decides whether the FBT exemption is available at all.

If you are buying in the business name, Emu Money's finance specialists compare business vehicle finance across 50+ lenders, so you can see what a chattel mortgage actually costs before you weigh it against a salary-packaged alternative. Subject to lender approval, terms, and conditions apply. Compare business car loan options.