OPERATING LEASE, FINANCE LEASE, CHATTEL MORTGAGE, NOVATED LEASE - WHAT'S THE DIFFERENCE?

Starting with the easy part: If you are a sole trader with an ABN looking to finance a car in your own name you can only choose a finance lease or chattel mortgage; most commonly a chattel mortgage, as this is what most car dealerships offer when you finance with them.

If you are an employee wanting to salary package a vehicle, or if you are a business looking to introduce salary packaging for your employees, then you are looking for a Novated Lease. A novated lease is generally a three way agreement between an employer, employee and lease company, under which the employee leases a vehicle from the lease company, and employer agrees to take on the employee's obligations under the lease. Normally, the employer then makes the lease payments on behalf of the employee, and deducts them out of the employee's pre-tax income.

If you are a business looking to finance cars, then you are looking for either an Operating Lease, Finance Lease or Chattel Mortgage. 

An Operating Lease is a lease on a vehicle for a set term in years and set number of kms. During the lease, all of the running costs are included (excluding fuel) and at the end you simply hand the car back and get a new one, or you can extend the current lease. There is no formal requirement to buy or residual value to be paid out with an operating lease (the car is always the property of the leasing company), just one simply monthly payment. They are usually packaged up with a lot of reporting functions too, so can be a great way for businesses with a few vehicles to keep track on everything that is happening with their fleet. 

Finance Lease is a lease on a vehicle for a set term in years. During the lease you pay for all the running costs and at the end there is an offer to buy the vehicle at the residual value. This value determined according to ATO and industry guidelines based on term and usage and, once paid, the vehicle becomes your property.

Chattel Mortgage is a type of finance where, similar to a home mortgage, you buy an asset (in this case a car) which the finance company finances on your behalf. In exchange for this, they secure their interest in the vehicle by taking a mortgage over the vehicle. At all times the vehicle is your property and, once all payments are made, the finance company will remove their mortgage. It’s also over a set number of years and can have a residual/balloon amount of your choosing (even zero). During the finance period all expenses are your responsibility. 

There are different tax and GST implications for each type of lease so it is important to speak with your accountant about which is right for your business.

For a full spread sheet to compare the differences finance options, see this link.