A Hire Purchase arrangement is a contract where the financier owns the equipment during the term of the hiring. The hirer pays instalments over the term of the loan, and when the final instalment has been paid, ownership of the equipment passes to the hirer. The equipment must be predominantly for business use, terms generally range from 12 to 60 months, and the interest rate is fixed for the term.
A Commercial Hire Purchase can also be called an offer to hire, hire purchase, asset purchase, CHP or a HP.
What are the benefits of a commercial hire purchase?
Deposit or trade options – if it suits you at the start of the contract which will reduce your monthly payments.
Flexible structured payments to suit your cash flow – payments monthly, quarterly, half yearly, yearly and seasonally.
Easy budgeting – your payments are fixed throughout the contract.
GST is not charged on payments.
Tax deductions on depreciation and the interest component of the payment.
The Hire Purchase contract can have a balloon payment at the end or you can choose to own it at the end.
Ownership under a Hire Purchase
Under a Hire Purchase agreement, the ownership of the goods is transferred to the hirer at the completion of the hire purchase contract. GST is not paid on the instalments, it can be claimed on the initial purchase. Residuals/Balloons on Hire Purchase Agreements
Hire Purchase agreements often contain options for residual or balloon payments at the end of the term which will reduce your monthly repayments during the contract term. At the end of the term when the residual or balloon is due there is an option to refinance it for a further term.
Accounting under Hire Purchase Agreements
The purchase price under a hire purchase contract is treated as a capital purchase and depreciated over the life of the asset. The interest cost is also treated as an expense. GST is accounted for at the start. Under a hire purchase, contract depreciation and interest charges are normally treated as deductible expenses for businesses. GST is usually claimed in full up front, however conditions apply
* Please refer to your Accountant or Advisor for Tax advice.
Both the asset and liability are shown on the balance sheet including GST
Upgrades and Add Ons
Upgrades and add ons generally require another hire purchase agreement and/or payout of the old hire purchase agreement.