How Does Hire Purchase Work?

Hire Purchase can also be referred to as Commercial Hire Purchase and Term Purchase. Under a hire purchase agreement, the lender (bank, finance company) owns the asset during the term of the loan. The lender registers an interest (also known as an encumbrance) in the asset to show others that they are using it as security for the loan.

Whilst you can use the asset while you are paying for it, ownership is only transferred to you when you make the final payment. The transfer happens automatically once the final payment is made and the lender also then removes their interest and you have what is known as ‘clear title’. You also have the option to purchase the asset at any time during the term of the agreement.

Hire purchase agreements are commonly used by companies, partnerships and sole traders when the asset is going to be used predominantly (50%+) for business use. Under Australian Taxation Office (ATO) rules, businesses that account for GST on a cash basis (they record business income and expenses as and when they occur) are generally entitled to claim an Input Tax Credit (ITC) for all of the GST contained in the purchase price of the asset on their next Business Activity Statement (BAS

Who Does Hire Purchase Suit?

Hire purchase is suitable when the asset will be used for predominantly (50%+) business purposes. The product is mainly used by ABN holders – companies, sole traders, trusts and partnerships.

Hire Purchase – Pros

Potential Tax Benefits  Under a hire purchase when the asset is used for business purposes you can generally claim the interest charges, running costs and depreciation as tax deductions. If you are registered for GST you can generally claim some or all of the GST contained in the purchase price of the asset and on any upfront charges when you lodge your next Business Activity Statement (BAS) rather than over the term of the loan. The GST on term charges can generally be claimed back as Input Tax Credit over the term of the loan.

No Capital Outlay  You can get the asset that you need for your business with zero or minimal outlay, so any capital that you do have can be used for other things.

Effective Cashflow  You can opt to include a residual value (balloon payment) at the end of your loan which reduces your repayment and frees up more cash.

Inclusions – You can potentially include things like government fees, insurance premiums and accessories as part of your loan, so one repayment covers all of your costs.

Minus Equity  If you are trading in an asset which is financed and you owe more on the outstanding loan than the asset is worth you may be able to include this minus equity amount in with the loan for the asset that you’re buying.

Hire Purchase – Cons

Security – Although using your asset as security can help to get you a lower interest rate it also means that if you don’t make your agreed payments you risk the asset being repossessed.

Personal Use  If you’re using the vehicle for predominantly personal purposes then a hire purchase agreement is not the most effective option for you.

Asset Only  By securing the loan against an asset it means that the amount that you borrow can only be used for the purpose of buying the asset. You can’t split the funds and use part of the asset and part for something else.

 Contact Us Today for More Information and Free No Obligation Quotes.

We strongly recommend that you consult your accountant or tax advisor to confirm the tax benefits available to you prior to entering into any finance agreement. The information provided is for product description purposes and is not intended to be used as taxation, financial or legal advice.