Hire Purchase

Tax effective hire purchase solutions for sole traders and businesses
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, updated on August 3rd, 2023       

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Hire Purchase

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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Getting you approved with your Hire Purchase

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Why should my business apply for a hire purchase?

Business gains many tax breaks and other incentives. GST paid on the asset as well as interest and depreciation is claimable; either are passed on by the lender or claimed by your business. You are also eligible for the instant tax write-off.

What is the difference between a chattel mortgage and a hire purchase?

chattel mortgage and hire purchase work the same in principle but are different “on paper.” In a chattel mortgage, your business places the asset on the books straight away. In a hire purchase, the bank or lender is the owner for the duration of the loan. This makes a different for accounting for assets vs. using operating capital. Your accountant may decide one option is better for your business over the other.

What is a balloon payment?

A balloon payment, or residual value payment, is a part of the loan set aside for payment at the end of the loan term. This has the effect of reducing regular repayments. When the loan term is up, you can pay out the balloon, refinance the balloon, or in some cases, trade in your equipment or car if it meets certain conditions.

What is meant by hire purchases being “cash-flow neutral?"

This means your business will not have to dip into savings or cash reserves to immediately fund the hire purchase. You can borrow 100% of the asset’s value, and even cover expenses such as registration, insurance, training, installation, and maintenance.

What loan terms are available?

Loan terms typically range from 12 months up to 7 years for hire purchases.

I run a seasonal business – are they eligible for hire purchases?

Yes, we can arrange seasonal repayment plans according to your requirements.

What is a finance lease?

A finance lease is an agreement to take possession (not ownership) of equipment or assets for a limited time. You pay to use the assets during the lease term. At the end, you can upgrade, hand the assets back, or start a new lease. Under a finance lease there is no option to claim GST.

Your comprehensive guide to hire purchases

Is a hire purchase eligible for the instant asset write-off?

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

What type of assets are considered for hire purchases?

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.

Can my business purchase the asset during the hire period?

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.

What type of assets are considered for hire purchases?

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.