Chattel Mortgage. There are other differences with how GST and repayments are treated see ICB Hire Purchase document for more detail.

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1 Chattel Mortgage What is a Chattel Mortgage? Chattel Mortgage is essentially a finance loan. A payment schedule is established over a number of periods depending on what you can afford per month. The instalment payments include principal and interest. A chattel mortgage is recommended when the use of the goods are more than 50% business use. Upon agreement of the Chattel Mortgage you take ownership of the goods upon delivery. Businesses can claim the entire GST component less private usage whether Cash or Accrual GST basis. A balloon or residual payment is optional to help reduce the interest paid. What is the difference between Chattel Mortgage and Hire Purchase Agreements? A Hire Purchase agreement is similar to a lease where regular repayments are made over a period range of 1-5 years but the lender holds the ownership of the goods until the final instalment is paid, whereas with a Chattel Mortgage, the purchaser takes title of the goods at the time of purchase. The Chattel Mortgage is secured by the lender holding a lien over the chattel, in this case, the vehicle, until the loan has been fulfilled. Funds are advanced via the mortgage to allow purchase of the vehicle. Legal ownership of the chattel is then transferred at the time of purchase. Once ownership is transferred, a business can claim depreciation, GST and interest expenses. There are other differences with how GST and repayments are treated see ICB Hire Purchase document for more detail. Chattel Mortgage Process The supplier invoice: The Institute of Certified Bookkeepers Page 1

2 The Finance Company schedule: To Check the Repayments If you are interested to see how the interest is calculated, search the web for Amortisation Schedule and check the calculation of the payments. The Institute of Certified Bookkeepers Page 2

3 Setup and Process Accounts required for Chattel Mortgage Process Reason Account Type Tax New Car Motor Vehicles At Costs Asset CAP-Capital Acquisition Registration and Insurance Motor Vehicle Expenses Expense GST/FRE/No Tax Chattel Mortgage Financier Liability Chattel Mortgage Liability No Tax Interest Charges Loan Interest Charges Expense FRE Entering the Purchase of the Chattel Mortgage Goods, in this example a Car 1. Deposit before purchase Allocated to Asset: Supplier Deposits 2. Purchase of Car Journal MV At Cost Purchase Car Asset DR $39, CAP GST Paid GST on Car Liability DR $3, MV At Cost Stamp Duty Asset DR $ No Tax MV Expenses Registration Expense DR $ FRE MV Expenses Insurance Expense DR $ GST GST Paid GST on Insurance Liability DR $29.55 MV Expenses Stamp Duty Expense DR No Tax Chattel Mortgage Chattel Mortgage Financier Liability CR ($42,463.00) No Tax Deposits on Suppliers Initial Deposit Asset CR ($3,000.00) No Tax 3. A purchase and payment or a Journal Entry could have also been used. 4. Borrowing Costs are amortised over the life of the loan or 5 years for tax. ICB recommends expensing them immediately and allow the accountant to make any necessary tax adjustments at end of year. The Institute of Certified Bookkeepers Page 3

4 Making the Repayments Option #1 1. Monthly payments. Monthly Payment is: $ Number of Payments: 48 See Finance Company schedule listed above. The first monthly payment will be recorded like this HP Interest Interest on Chattel Mort Expense DR $ FRE Chattel Mortgage Principal on Chattel Mort Liability DR $ No Tax Bank Payment Asset CR ($887.43) No Tax 2. Save this transaction as a Recurring or Memorised Transaction 3. NOTE: If you don t have the breakdown of the interest as per the above example, do not make it up. The accountant will work out the interest charges at end of year and apply them. If you only have the repayment amount (in above example, $887.43), do not enter amounts for unexpired term charges OR term charges, simply post the entire amount to the Finance Company liability account. Option #2 Optional and not necessary but some prefer show the total value of Interest for the term of the Chattel Mortgage on the Balance Sheet using Unexpired Term Charges to show Interest paid thus far 1. Additional Accounts required. Add directly under the Chattel Mortgage Liability Account Reason Account Type Tax Chattel Mortgage Financier Liability Chattel Mortgage Liability No Tax Unexpired Interest Less: Unexpired Interest Liability No Tax Bring in Borrowing Costs Borrowing Costs on Chattel Liability No Tax 2. Create a Journal Entry to bring in the Interest Charges against the Chattel Mortgage Company Borrowing Costs Establishment Fee Expense DR $ FRE Borrowing Costs Registration Fee Expense DR $8.10 FRE Borrowing Costs Stamp Duty on Loan Expense DR $ No Tax Chattel Mortgage Interest and Borrowing Costs Liability CR ($10,133.64) No Tax Unexpired Interest Less Unexpired Int Liability DR $9, No Tax 3. Monthly payments. Monthly Payment is: $ Number of Payments: 48 See Finance Company schedule listed above. The Institute of Certified Bookkeepers Page 4

5 The first monthly payment will be recorded like this HP Interest Interest on Chattel Mort Expense DR $ FRE Unexpired Interest Liability Unexpired Int Liability CR ($308.03) Chattel Mortgage Chattel Mortgage Liability DR $ No Tax Bank Payment Asset CR ($887.43) No Tax 4. Save this transaction as a Recurring or Memorised Transaction References: ATO Chattel Mortgages ATO Motor Vehicles and GST The Institute of Certified Bookkeepers Page 5