How to record a chattel mortgage or hire purchase in Xero: the journals, the GST and the schedule

Chattel mortgage, hire purchase or lease: what you’re recording

The agreement type decides who owns the asset, how the GST works and what the ledger shows, so read the contract before you code anything. The lender’s product name isn’t always a reliable guide.

• Chattel mortgage. The client buys the asset, takes title from the time of purchase and borrows the price from the lender, who holds a mortgage over the asset as security. In the books it’s an asset and a loan.
• Hire purchase. The financier owns the goods until the final instalment is paid or the purchase option is exercised. For tax and in most client files it’s still recorded as an asset and a liability, because the client is expected to end up owning it.
• Lease. The lessor owns the asset and the client pays rent for its use. Each lease payment carries its own GST, period by period, and there’s no loan to schedule.

For income tax, the holder of a depreciating asset claims its decline in value. Under a hire purchase the ATO treats the client as the notional buyer, financed by a notional loan, and the notional interest is deductible to the extent the asset is used to earn income.

GST on a chattel mortgage and on hire purchase

This is where the two agreements part company. A chattel mortgage is a loan, and the ATO treats a loan as an input taxed financial supply. A hire purchase entered into from 1 July 2012 is taxable in every component, whether or not the interest is shown separately.

Hire purchase agreements entered into before 1 July 2012 still follow the old rules: a disclosed interest charge is input taxed, and a cash-basis client claims the GST in each instalment as it’s paid. You’ll still meet them in long-held truck and plant files.

A worked example: a $96,000 excavator on a chattel mortgage

Bull Antics Pty Ltd buys an excavator for $96,000 including GST and finances the full price on a chattel mortgage settled on 31 December 2026. The rate is 7.95% a year, with 12 quarterly repayments of $9,070.75 in arrears from 31 March 2027. The company reports GST quarterly.

At settlement the asset goes on at its GST-exclusive cost and the GST credit of $8,727.27 goes in the October to December 2026 BAS. The liability is the full amount financed.

Each quarter’s interest is the opening balance times the quarterly rate. The first repayment carries $1,908.00 of interest ($96,000 × 7.95% ÷ 4) and $7,162.75 of principal. Over the three years the company pays $12,849.06 in interest, $3,673.64 of it in the year to 30 June 2027.

If the contract states only the repayment amount, the rate in the schedule is the one that makes the present value of the repayments equal the amount financed. Build the schedule from the contract, then check its last balance is $0.00, or the residual if there is one, before you post anything from it.

How to journal each chattel mortgage repayment in Xero

We’d suggest coding the whole repayment to the liability, BAS Excluded, and posting the interest as a separate journal. The bank rule stays simple because the repayment is the same every quarter, and the interest comes from the schedule rather than from whoever reconciles the bank.

Two other methods are common, and both work if they’re kept up:

Whichever method you pick, set the finance account up as a non-current liability. Xero lets you set a loan up as a bank account when there’s a feed, but it doesn’t allow manual journals to a bank account, and it warns that the current ratio on the dashboard won’t be right.

Recording a hire purchase instead

Put the same cash flows through a hire purchase entered into on or after 1 July 2012 and the ledger changes in one place: the GST. The client claims one-eleventh of everything payable, $108,849.06 ÷ 11 = $9,895.37, in the period of the first payment or the tax invoice. That includes $1,168.10 of GST on the interest.

Each repayment is coded to the liability with no GST. Each interest journal moves the GST-exclusive interest out of unexpired interest: for the first repayment that’s $1,734.55 of the $1,908.00. The last journal clears whatever rounding is left so unexpired interest closes at nil.

Reconciling the liability through the year

After each repayment and its journal, the liability in Xero should equal the schedule balance, and the schedule should equal the lender’s statement. If one of the three disagrees, find out why before the next quarter adds to it.

At 30 June 2027 Bull Antics’ chattel mortgage is $81,532.14. The principal in the next four repayments is current; the rest is non-current.

Finance liabilities belong on the same month-end list as the other balance sheet accounts your team signs off, such as inter-entity loans between a group’s entities. A review that ticks off the bank and leaves the finance accounts until year end is how a catch-up journal ends up in June.

Step by step: setting up a new agreement on a client file

1. 01

   Get the contract and the supplier’s tax invoice.

   You need the amount financed, financier, contract date, first repayment date, frequency, number and amount of repayments, and any residual or balloon.

2. 02

   Confirm the agreement type and its date.

   Chattel mortgage, hire purchase or lease, and for hire purchase whether it was entered into before or after 1 July 2012.

3. 03

   Set up the accounts.

   A non-current liability for the agreement, a current portion account, interest expense, and unexpired interest if you record gross.

4. 04

   Post the settlement.

   Asset at its GST-exclusive cost, the GST credit in the right BAS period, deposit or trade-in lines, and the liability. Register the asset so it depreciates.

5. 05

   Build the schedule.

   Check the repayment, rate and term agree with the contract and that the balance closes at nil or the residual.

6. 06

   Code each repayment to the liability.

   BAS Excluded, with a bank rule if the amount is fixed.

7. 07

   Post the interest journal after each repayment.

   From the schedule, dated on the repayment date, so monthly and quarterly reports carry the right interest.

8. 08

   Reconcile at each month or quarter end.

   Liability against the schedule; schedule against the lender’s statement.

9. 09

   Split current and non-current at 30 June.

   Next 12 months’ principal to current, and check any balloon falls in the right side.

Mistakes reviewers find in finance accounts

• GST coded on a chattel mortgage repayment. It claims a credit the client isn’t entitled to, and the liability won’t agree with the lender. It’s the first cause listed in AccountKit’s own help for an out-of-balance schedule.
• A hire purchase treated like a chattel mortgage. After 1 July 2012 the GST on the interest is claimable up front, so a file that only claimed GST on the price has left credits unclaimed.
• A fixed split in a bank rule. The interest in each repayment falls, so the split drifts from the schedule from the second repayment.
• One catch-up interest journal at year end. The annual figure may be right, but every monthly and quarterly report before it understated both the interest and the liability.
• The asset at its GST-inclusive cost. Depreciation is overstated and the GST credit is either missed or claimed twice.
• A balloon or residual left out of the schedule. The schedule closes at nil while the lender still expects a final payment.
• The whole liability in non-current. The balance sheet shows no current debt and the current ratio looks better than it is.
• Registration, stamp duty or insurance financed with GST. Amounts the financier pays for the client aren’t its taxable supplies, so they need their own coding.

How AccountKit handles equipment finance

AccountKit’s equipment finance tool builds the schedule from the contract, for regular repayments or irregular ones such as a larger second repayment that clears the GST, or a gap after harvest. For a new agreement it posts the purchase journal to Xero; for an existing one you set a conversion date and it posts from there. After each repayment date it posts the interest journal (BAS Excluded by default), keeps the next 12 months in current liabilities if you use that setting, and shows whether the Xero balance agrees with the schedule.

The Cashflow Commitments report adds up what every agreement still has to pay when a lender asks. For the other balance sheet accounts on your month-end list, the account reconciler does the same job, and pricing shows the plans that include them.