Under a hire-purchase agreement, management purchases equipment by instalments. This is where the lender buys the equipment at the borrower’s inclination. Thus ownership is only passed to the borrower at the end of the contract, therefore making any repayments being termed in the nature of hire or rental costs.
This has the benefit of not owing the full purchase price at the outset or having to pay a significant residual payment. Also, since the interest rate is fixed for the contract’s term, this means repayments can also be fixed.
The Commercial Hire Purchase (CHP) agreement is simply a contract where the financier (the ‘owner’) allows you (the ‘hirer’) the right to possess and use equipment in return for regular payments.
Upon completion of the CHP and following your final payment, full vehicle ownership is transferred to you.
Benefits of Commercial Hire Purchase
• Flexible contract terms
• Fixed interest rates
• Fixed monthly lease rentals
• Costs are known in advance
• Deposit (either cash or trade-in) may be used
• A residual can be applied to contract, lowering monthly payments
• Tax deductions can be claimed for depreciation of the equipment
• Customers registered for GST can claim the GST in the equipment’s price
• Ability to structure your repayments to suit cash-flow trends
Tax Implications of a Commercial Hire Purchase
Where the hirer is registered for GST, they can apply Input Tax Credits to claim back the GST contained in the purchase price of the equipment.
Businesses using Accrual accounting can claim the GST as a lump sum on their next Business Activity Statement (BAS), whereas those using Cash accounting can claim the GST in instalments over the term of the contract.