If you are a sole trader who has heard about the tax savings from novated leases and wondered if they apply to you — the short answer is no. But that does not mean you are out of options. Finance lease, chattel mortgage, and business car loans all offer genuine tax benefits for self-employed Australians. This guide explains exactly what is available, how each option works, and which is likely to suit your situation.
A novated lease is a three-way arrangement between you, your employer, and a finance company. Your employer makes lease payments from your gross salary before PAYG tax is calculated — this is the salary sacrifice mechanism that generates the tax saving.
As a sole trader you are your own business. There is no employer-employee relationship to form the third side of the arrangement. The ATO specifically requires that the benefit be provided to an employee by their employer. Sole traders, contractors operating through their own ABN, and business owners who pay themselves distributions rather than salary are all excluded.
Operating through a company or trust structure does not automatically make you eligible for a novated lease. Whether you can access one depends on whether you are genuinely employed on a PAYG basis and whether your employer is set up for salary packaging. If you are unsure, ask a tax adviser.
The good news is that the Australian tax system does offer meaningful deductions for business vehicle use — just through different mechanisms to salary sacrifice. Here are the four main structures available:
You own the vehicle from day one. A lender provides the funds and takes a mortgage over the asset as security. GST-registered businesses can claim the full GST credit upfront. Interest is deductible. Depreciation is claimed over time (or instantly if the asset qualifies).
The finance company owns the vehicle and leases it to you. Lease payments are fully deductible as a business expense (business-use portion). ATO residual percentages apply at the end of the term. No GST upfront — it is claimed progressively through repayments.
A standard loan where you own the vehicle and repay principal plus interest. Interest is deductible on the business-use portion. Simpler than chattel mortgage in some respects — though the tax treatment is largely equivalent for most sole traders.
Pay the full amount from business or personal savings. No interest to pay, no lender. But tying up capital in a depreciating asset has an opportunity cost — that cash could be earning returns or reducing a mortgage. Use the Veercal opportunity cost guide to model this.
For most sole traders who are GST-registered and use a vehicle predominantly for business, a chattel mortgage is the most tax-effective structure. Here is why:
If you are registered for GST, you can claim the GST component of the vehicle purchase price in your first BAS after settlement — rather than waiting for it to come through in depreciation. For a $44,000 vehicle the GST is $4,000 — cash in your hand within months of purchase. The GST claim is capped at $6,334 for FY2025-26 (one-eleventh of the ATO car cost limit of $69,674), regardless of what you paid.
The interest component of each repayment is deductible for the business-use percentage of the vehicle. On a $40,000 loan at 7.5% over 5 years with 80% business use, you are deducting roughly $1,200–$1,400 per year in the early years of the loan.
You can claim depreciation on the vehicle based on the business-use percentage. The ATO car cost limit caps the depreciable value of passenger vehicles at $69,674 for FY2025-26. Vehicles above this — including luxury cars — can only be depreciated up to this cap.
Figures are illustrative. Actual deductions depend on your business structure, use percentage, and tax situation. Consult a registered tax agent.
A finance lease works similarly to a chattel mortgage in practice — you use the vehicle, you have a residual at the end, and the ATO sets minimum residual percentages based on annual kilometres. The key difference is ownership: the finance company owns the car throughout the lease.
This has a few practical consequences:
The same ATO minimum residual percentages apply to finance leases as to novated leases — based on annual km over the term. For 20,000 km/yr the minimum residual is 46.69% of the vehicle price. These are minimums — the actual residual in your contract may be higher.
For a full comparison of finance lease numbers, the Veercal full calculator models finance lease side-by-side with cash, personal loan, dealer finance, and novated lease.
A business car loan is straightforward — you borrow money, purchase the car, own it outright, and repay the loan. For tax purposes it is treated similarly to a chattel mortgage: interest is deductible, depreciation is claimed, and GST can be recovered (if GST registered, on the business portion, capped at the car limit).
The distinction between a "business car loan" and a chattel mortgage is largely a product labelling one. In both cases you own the vehicle and a lender has security over it. The tax treatment is effectively the same. The chattel mortgage name is more commonly used in commercial lending.
Cash is the simplest option and eliminates interest costs entirely. For sole traders with strong cash reserves, no debt aversion, and a vehicle under $20,000 (eligible for the instant asset write-off), cash plus immediate deduction can be the cleanest outcome. However:
The ATO allows two methods for claiming car running expenses:
| Method | How it works | Best for |
|---|---|---|
| Logbook method | Keep a 12-week logbook to establish your business-use %. Apply that % to all running expenses and depreciation for 5 years. | High business use, expensive vehicles, maximising deductions |
| Cents per km | Claim a flat 88 cents per business km (FY2025-26), up to 5,000 km. No receipts required. | Low business km, simple situation, occasional business use |
For most sole traders who use a vehicle regularly for business, the logbook method produces a larger deduction. Set up a logbook when you acquire the vehicle — you will use it for 5 years before needing to redo it.
Under the logbook method you can claim the business proportion of: fuel, registration, insurance, servicing and repairs, tyres, car wash, loan interest, and depreciation. You cannot claim private-use expenses.
For FY2025-26, eligible small businesses with an aggregated annual turnover under $10 million can immediately deduct the full cost of assets under $20,000, provided they are first used or installed ready for use by 30 June 2026. This extension is now law.
Most passenger vehicles cost more than $20,000, so they will not qualify for the instant write-off regardless. A car over $20,000 goes into the small business depreciation pool: 15% deduction in year one, 30% each year after. The instant write-off is more relevant for commercial vehicles (utes, vans) under $20,000, tools, or equipment.
Commercial vehicles with a load capacity over one tonne — such as most dual-cab utes — are not subject to the ATO car cost limit. If a tradesperson buys a $19,000 work van that is used entirely for business, they can write off the full amount in FY2025-26. Speak with a registered tax agent to confirm eligibility for your specific vehicle.
| Structure | Own vehicle? | GST upfront? | Interest deductible? | Lease payments deductible? | ATO residual? |
|---|---|---|---|---|---|
| Chattel mortgage | ✓ Yes | ✓ Yes (capped) | ✓ Business % | — | Optional |
| Finance lease | ✗ Lessor owns | ✗ No | — | ✓ Business % | ✓ ATO minimum |
| Business car loan | ✓ Yes | ✓ Yes (capped) | ✓ Business % | — | Optional |
| Cash | ✓ Yes | ✓ Yes (capped) | — | — | No |
| Novated lease | ✗ Not available to sole traders | — | — | — | — |
The right structure depends on three things: how much you use the vehicle for business, whether you are registered for GST, and whether you prefer to own the vehicle outright or have flexibility at the end of the term.
If you operate through a company or trust rather than as a sole trader, additional options and considerations apply — including the potential for you to be employed by your own company and access a novated lease, though this has specific conditions. Company cars provided to employee-directors attract FBT. This is a complex area and professional advice is essential before making structural decisions for tax purposes.
The Veercal calculator models cash, personal loan, dealer finance, and finance lease side by side — showing the true total cost for your vehicle price, state, and usage pattern.
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