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What is Hire Purchase?

A Hire Purchase is a vehicle financing option for a vehicle that will be used primarily for business use.  It can also be known as a CHP, Commercial Hire Purchase, Corporate Hire Purchase, Asset Purchase, Offer to Hire or Term Purchase.

How does a Hire Purchase work?

A Hire Purchase agreement is where the finance provider agrees to purchase the vehicle on behalf of the customer and the customer hires the vehicle from the finance provider over an agreed period of time for a fixed monthly repayment.

The ownership of the vehicle is not transferred to the customer until the final payment / balloon payment has been made.

Under a Hire Purchase agreement, the customer is the registered owner of the vehicle and is responsible for all costs associated with maintaining, running and insurance for the vehicle.

Hire Purchase Features

  1. Low establishment fees and monthly fees, no payout penalties
  2. Commercial Hire Purchase terms range from 1 to 5 years
  3. Interest rate is fixed for the term
  4. Hire Purchase monthly repayments are fixed for the term
  5. You can claim the interest and depreciation as a tax deduction
  6. Residuals and balloons can be structured to reduce your repayments

Possible Hire Purchase Taxation Implications

A Hire Purchase allows the hirer to claim an input tax credit for the GST component of the purchase price, provided that the customer is registered for GST.  Where the customer is using the accrual accounting method, the input tax credit may be claimed on the next BAS.  If the cash method of accounting is used, the GST can be claimed as an input tax credit over the term of the contract.

The monthly repayment or balloon amount is not subject to GST.

Where the vehicle is used for business use, the hirer can claim interest and depreciation.  That is interest on the lease payments and depreciation up to the luxury car tax threshold or depreciation limit (currently $57,180).

Who does Hire Purchase suit?

A Hire Purchase suits someone who is going to use the vehicle predominately for business use, therefore this car financing product is normally used by Companies, Trusts, Sole Traders, Partnerships, ABN Holders and individuals who receive a car allowance.

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* Information contained within this article is correct at time of writing and is general information only. This should not be taken as financial advice.

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