Two clients both have a $60,000 repayment going out to a lender each month. One has a business loan. The other has a chattel mortgage over a fleet vehicle. The bank statements look almost identical. The accounting treatment is entirely different.
Misclassifying business lending arrangements is one of the most consequential bookkeeping errors a practice can make — it affects the balance sheet, the profit and loss, the BAS, and the asset register simultaneously. This guide covers the correct treatment for each structure an Australian bookkeeper is likely to encounter.
Business loans: the standard treatment
A standard business loan — typically an overdraft, term loan, or commercial bill — is the simplest structure to record.
Initial drawdown
When the loan is drawn:
- Debit: Bank account (asset increases)
- Credit: Loan payable (liability increases)
The full loan principal sits on the balance sheet as a liability. The loan is not income, and no GST arises on the principal amount.
Monthly repayments
Each repayment must be split between principal and interest. The bank statement shows a single outgoing figure, but the split is in the loan schedule provided by the lender:
- Principal component: Debit Loan Payable (reduces the balance sheet liability)
- Interest component: Debit Interest Expense (P&L)
- Credit: Bank account (full repayment amount)
GST on interest: Interest charges on business loans are input-taxed — they are financial supplies. Code interest expense as INP (input-taxed), not GST. No ITC is available on interest charges.
Common mistake: Coding the entire repayment to an interest expense account, or coding it all to a loan repayment account and never recognising the interest on the P&L. Both produce materially incorrect financial statements.
Establishment fees
Loan establishment fees charged by the lender are also financial supply costs — code as INP. If the establishment fee is material and the loan has a multi-year term, it may need to be amortised over the life of the loan rather than expensed immediately. Flag to the accountant for direction on treatment.
Chattel mortgage
A chattel mortgage is the most common equipment finance structure for GST-registered businesses in Australia. The borrower takes ownership of the asset immediately (unlike hire purchase, where ownership passes at the end). The lender holds a mortgage over the asset as security.
GST treatment at the start: the key advantage
This is the defining feature of a chattel mortgage from a GST perspective: the entire GST component of the asset purchase price is claimable as an ITC in the BAS period when the contract is signed — not spread over the repayments.
If a business buys a $110,000 vehicle under a chattel mortgage (including $10,000 GST), it can claim the full $10,000 ITC in the BAS for the period the contract was entered into.
Bookkeeping entries at commencement:
- Debit: Vehicle (or relevant asset account) — full purchase price including GST: $110,000
- Credit: Chattel mortgage liability: $110,000
- GST: Claim the $10,000 ITC on the BAS (coded as GST on the purchase)
The net effect on the BAS is an ITC of $10,000 in a single quarter, which often significantly reduces the BAS liability for that period.
Monthly repayments (chattel mortgage)
Monthly repayments split between principal and interest — identical in structure to a business loan:
- Principal: Debit Chattel Mortgage Liability
- Interest: Debit Interest Expense (INP — input-taxed)
- Credit: Bank
Depreciation
The asset is owned by the business from day one, so depreciation applies from acquisition. The depreciation method (diminishing value vs prime cost) and rate depend on the asset type — confirm with the accountant. Code depreciation as a P&L expense; no GST applies.
Hire purchase
Under a hire purchase arrangement, the financier owns the asset during the loan term and the business makes repayments. Ownership transfers to the business when the final payment is made.
The ATO treats hire purchase as equivalent to chattel mortgage for GST purposes — the business can still claim the full GST ITC upfront, in the period the hire purchase contract is entered into.
However, because ownership does not technically transfer until the final payment, the accounting treatment requires care:
- Record the asset on the balance sheet immediately (the business has the risks and rewards of ownership from day one, even though legal title is delayed)
- Record the hire purchase liability on the balance sheet
- Depreciate the asset over its useful life
The repayment split and interest coding are the same as for a chattel mortgage.
Finance lease
A finance lease transfers substantially all the risks and rewards of ownership to the lessee, even though the lessor retains legal title. Under Australian accounting standards (AASB 16), finance leases are recognised on the balance sheet.
GST on a finance lease
The GST treatment differs from chattel mortgage and hire purchase:
- GST is charged on each lease payment (not as a lump sum upfront)
- The business claims an ITC on each payment as it is made
- There is no upfront ITC on the full asset value
This has cash flow implications compared to a chattel mortgage. Under a chattel mortgage, the full ITC is claimed immediately. Under a finance lease, ITCs are spread across the lease term. Clients should understand this difference when choosing a finance structure.
Balance sheet treatment
Record the right-of-use asset and the corresponding lease liability at the present value of future minimum lease payments. Each payment is split between interest expense (INP) and reduction of the lease liability. The asset is depreciated over the lease term.
In practice: For most bookkeepers, the initial AASB 16 entries for a finance lease will be prepared by the accountant. The bookkeeper's ongoing role is to split each lease payment correctly and ensure the interest component is coded INP rather than GST.
Operating lease
An operating lease is a rental arrangement where the risks and rewards of ownership remain with the lessor. The business is simply paying to use the asset.
Under AASB 16 (which applies to most entities with reporting obligations), most leases are now required to be on-balance-sheet — the operating lease category is substantially narrower than it was under the old standard.
For entities using the simplified reporting provisions (most small businesses), operating lease payments can be expensed directly to the P&L as rent or lease expense.
GST on operating lease payments: Each payment includes GST (assuming the lessor is GST-registered). Claim the ITC on each payment as it is made — code as GST.
A quick reference summary
| Structure | GST treatment | Asset on balance sheet? | Upfront ITC? |
|---|---|---|---|
| Business loan | INP on interest | No (loan funds asset) | No |
| Chattel mortgage | Full ITC upfront | Yes, from day one | Yes |
| Hire purchase | Full ITC upfront | Yes, from day one | Yes |
| Finance lease | ITC per payment | Yes (AASB 16 ROU asset) | No |
| Operating lease | ITC per payment | Generally no (small biz) | No |
The questions to ask when a new finance arrangement arrives
When a client signs a new finance contract, get a copy of the contract and ask:
- Is this a chattel mortgage, hire purchase, finance lease, or operating lease?
- What is the full term, the interest rate, and the monthly payment schedule?
- Can the lender provide a repayment schedule showing the principal and interest split for each payment?
The repayment schedule is the most important document. Without it, the principal/interest split on each payment is an estimate — and estimates accumulate into material errors over a three- or five-year loan term.
If the lender cannot provide a schedule, an amortisation calculation can be built using the loan amount, interest rate, and term. Most accountants can provide this, or it can be constructed in a spreadsheet.
Getting lending and equipment finance right from the start sets up clean financials, accurate BAS reporting, and a reliable asset register — all of which save significant remediation effort later.
This article was last reviewed on 19 November 2026. This is general guidance, not specific accounting or tax advice. Consult a registered tax agent or accountant for advice specific to your client's circumstances.