Equipment financing is one of the most common ways Australian small businesses acquire plant and machinery, vehicles, and technology assets. Hire purchase and chattel mortgage are the dominant structures, and both require specific accounting treatment that differs from outright purchase. The key issues are asset recognition under AASB 16, the timing of GST Input Tax Credit claims, and the split between principal and interest in each periodic payment. Getting these wrong affects the balance sheet, the P&L, and the BAS.
Hire Purchase vs Chattel Mortgage — the Legal Distinction
Despite sharing many economic features, hire purchase and chattel mortgage are legally different structures with different accounting consequences.
In a hire purchase, the finance company retains legal ownership of the asset throughout the agreement. The borrower (the hirer) has possession and use. Legal title only transfers to the hirer on the final payment. Under Australian accounting standards, a hire purchase is a finance lease (right-of-use asset) for accounting purposes — the substance of the arrangement is that the hirer bears virtually all the risks and rewards of ownership, even though legal title is deferred.
In a chattel mortgage, legal title passes to the borrower at inception. The finance company takes a mortgage (a security interest) over the asset as collateral. From day one, the asset is legally the borrower's property. For accounting purposes, this is an outright asset purchase funded by a secured loan.
The practical accounting consequence: both structures result in the asset appearing on the balance sheet (under AASB 116 for chattel mortgage, and under AASB 16 right-of-use assets for hire purchase) and a corresponding liability. However, the liability account names differ — hire purchase creates a lease liability; chattel mortgage creates a borrowing. The balance sheet presentation is similar but the disclosures differ.
AASB 16 Right-of-Use Asset (Hire Purchase)
Under AASB 16, a hire purchase agreement that meets the definition of a finance lease — which effectively all hire purchase arrangements do, since the hirer acquires substantially all economic benefits and bears substantially all risks — is recognised as a right-of-use asset and a corresponding lease liability at commencement.
The right-of-use asset is measured at the present value of future lease payments, discounted at the interest rate implicit in the lease (typically available from the finance contract) or, if that cannot be readily determined, at the lessee's incremental borrowing rate. The asset is then depreciated over its useful life (not the lease term, since ownership transfers at the end), and the liability is unwound using the effective interest method.
Each payment breaks into principal (reducing the liability) and interest (P&L expense). The split is not even — in the early periods of the agreement, the interest component is higher, and the principal repayment accelerates toward the end. The amortisation schedule from the finance company shows this split; the bookkeeper must post interest expense and principal reduction separately on each payment date.
Chattel Mortgage Asset and Liability Recognition
For a chattel mortgage, the asset is recognised at cost (the cash equivalent price) on the commencement date, regardless of the financing structure. The full cost — including any establishment fees and stamp duty on the security agreement — is the initial carrying amount under AASB 116.
The chattel mortgage loan is recognised as a financial liability at amortised cost under AASB 9. The borrowing is split between current (payments due in the next 12 months, principal component only) and non-current (remaining principal). Each periodic repayment is split between interest expense (P&L) and principal repayment (balance sheet). The interest is calculated on the outstanding principal balance using the effective interest rate.
Balloon payments — common in chattel mortgage structures — create a non-current liability that does not reduce until the balloon is paid. The bookkeeper must ensure the balloon amount is correctly classified as non-current until it falls within the 12-month current window.
GST Timing on Hire Purchase and Chattel Mortgage
This is the area most frequently mishandled. The GST rules for hire purchase and chattel mortgage create a full GST Input Tax Credit entitlement at commencement — not over the life of the agreement — provided the goods are acquired for a creditable purpose.
Under the GST Act, a hire purchase agreement is treated as an instalment supply. Subdivision 153-B of the GST Act provides that the full GST on the acquisition is attributable to the first tax period in which the first payment (or the consideration determined) becomes due. This means the entire ITC on the asset price (typically one-eleventh of the financed amount) is claimable on the BAS in the period the agreement is entered into, not spread across the agreement term.
For a chattel mortgage, the treatment is straightforward: the purchase occurs at commencement, the tax invoice is issued by the vendor, and the full ITC is claimable in the period the tax invoice is received and the relevant conditions are met.
The interest component of either arrangement does not carry GST — interest on a borrowing is an input-taxed financial supply. Only the underlying price of the goods carries GST.
Accounting for Early Termination
Where a hire purchase or chattel mortgage agreement is terminated early — because the asset is sold, written off, or the agreement is refinanced — the bookkeeper must reconcile the carrying value of the asset against the settlement figure.
For a chattel mortgage: the settlement figure from the financier includes the outstanding principal plus any early repayment fee. The asset is derecognised at its carrying amount (cost less accumulated depreciation). Any difference between the carrying amount and the settlement figure, net of the asset's sale proceeds, flows through the P&L as a gain or loss on disposal.
For a hire purchase: the right-of-use asset is derecognised at its carrying amount, and the lease liability is derecognised at the outstanding balance. Any early termination payment to the financier is expensed immediately.
Both scenarios may require a GST adjustment if the early termination gives rise to a taxable supply or an adjustment event under Division 19 of the GST Act.
How Reconlink Supports Equipment Financing
Businesses with multiple financed assets — fleets, machinery, technology — have regular repayment transactions flowing through their bank accounts. Reconlink's automated coding rules recognise recurring hire purchase and chattel mortgage repayment patterns by institution and description string, splitting each payment into the correct interest expense and principal reduction accounts. Importing your bank statement (CSV, Excel or PDF) — or forwarding it to your per-client email inbox — ensures repayment transactions are captured and reconciled without manual data entry. BAS export correctly codes ITC claims on new finance agreements in the relevant tax period, avoiding the common error of claiming GST on interest payments.