Commercial Hire Purchase

ATO treats a hire purchase agreement as a sale of goods. In another words, the hire purchase arrangements could be described as a purchase good through instalment payments.

The commercial hire purchase agreement is a very flexible form of asset purchase finance. The financial company retains ownership until the business pays it off on a principal plus interest. Interest is tax deductible and the business can claim for tax deduction for depreciation. Business can elect to have repayments scaled down in the early years of a commercial hire purchase contract and to make a ‘catch-up’, or ‘balloon’ payment, at the end of the contract.

It is quite common see business motor vehicles are acquired this way. Other common types of business hire purchases include expensive medical equipments, office refurbishments, office equipments, and business equipments.

You want to hire purchase your business equipment, because of the following reasons: -

  • You may want to have a flexibility of gaining ownership of an asset at the end of the term. Ownership passes on final payment.
  • You can claim depreciation of an asset.
  • Interest of hire purchase is tax deductible.
  • Flexible on the length of term and the balloon payment options. Repayments can be set to a manageable amount that your business can afford.
  • Most finance companies lend on unsecured basis and only require your personal guarantee.

Basically a hire purchase agreement is based on the understanding that the purchaser will make periodic hire purchase repayments with the aim of eventually acquiring the business asset.

The purchaser records the hire purchased property as a non-current asset in the business balance sheet. The corresponding hire purchase instalments liabilities are recorded in liability section for the future hire purchase payments.

As a result, unlike the previous lease arrangement where the repayments are treated as expense, the hire purchase payments are not treated as a business expense item and allocated to the hire purchase instalments liabilities accounts in the balance sheet, reducing the hire purchase debts.

If you account for GST on a cash basis, GST input tax credit amount is one-eleventh of the principal component and is claimed by dividing GST input tax credit amount by number of instalments. You do not claim GST on the interest charge disclosed in the contract as it is a financial supply.

If you account for GST on an accrual basis, you can claim the full GST credit on your hire purchase agreement.

Disclaimer

Every effort has been made to offer the most current, correct and clearly expressed information possible within this site. Nonetheless, inadvertent errors can occur and applicable laws, rules and regulations may change.

These materials on this website are general in nature. It is made available on the understanding that the JH Business Services & Taxation is not thereby engaged in rendering professional advice. Before relying on the material in any important matter, users should carefully evaluate its accuracy, currency, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.

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