What is a hire purchase?
A hire purchase is a flexible and cash flow neutral finance solution for business looking to eventually own cars, equipment, or long-term assets. Repayments can be tailored to your business cycle. You can reduce repayments using a balloon payment (residual value) payment, due at the end of the loan term. A hire purchase doesn’t require a deposit, and all repayments are on the books as operating expenses. As a business loan, you can also finance maintenance and servicing as part of the hire purchase agreement, with an amount more than 100% of your asset’s value.
Accounting and tax benefits
With all hire purchases, ownership of the equipment or car rests with the lender until the end of the loan term. This means you are effectively hiring or renting the asset which means repayments are classified as a business operating expense. Your lender may claim GST, depreciation, and interest paid on the loan and pass it on as savings to you. This may suit businesses that require off-balance sheet accounting. Our experienced consultants have access to the best finance products and rates. Savvy will make it simple and easy for you to make an informed decision.
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Though not as common as their fixed counterparts, you can get a variable rate car loan. These are harder to budget for due to their rates being pegged by the official cash rate set by the RBA. You could experience reduced repayments if the market goes down; but increased payments if the rates go up.
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Your comprehensive guide to hire purchases
According to the Australian Taxation Office, a hire purchase is eligible for the instant asset write-off, check the ATO website to see what the current limit is. Though a hire purchase arrangement does not add an asset on to your books immediately, the method of acquiring the asset (chattel mortgage, buying outright, or hire purchase) and whether it is used for business purpose will determine whether the purchase qualifies for the tax write-off
Almost any type of performing or non-performing asset is eligible for a hire purchase. “Performance” refers to whether the asset directly or indirectly contributes to the business’ gross profit. A coffee shop may need an espresso machine and chairs. The espresso machine is a performing asset as it makes the coffee for sale. A chair is a non-performing asset, as it’s there for customer comfort and does not generate revenue. As long as the asset is used primarily for business use, it is eligible for hire purchase finance.
Yes – if your business wishes to purchase the assets outright from the bank or lender, you do have an option to pay out the loan. This may suit a business that wants to transfer their equipment or car onto their books as assets. In some hire purchases, you may have options to buy the asset outright at various times during the loan term. This can save money in interest repayments, although fees and charges could apply. Always talk to your accountant before making any decision.
Any business with an active ABN that intends to use the equipment or vehicle for more than 50% business use may apply for a hire purchase. This includes partnerships, sole traders, and other incorporated entities. If a sole trader wishes to buy a car using a hire purchase, they must demonstrate the car will be used for business purposes more than half the time. If it will be used for personal use most of the time, the best way to finance a vehicle would be to apply for a commercial car loan.