The short answer
A commercial hire purchase is an agreement where the lender buys a vehicle or piece of equipment and hires it to your business for a fixed term, with ownership passing to the business when the final instalment is paid. You use the asset from day one, much as you would under a chattel mortgage, but the lender holds title until the end. The GST treatment changed for agreements made on or after 1 July 2012. All components of these agreements are subject to GST, including the credit charge, and a registered business can claim the GST credit for the whole agreement upfront, whether it accounts for GST on a cash or non-cash basis (ATO). For income tax, a hire purchase is generally treated as a sale with a loan, so the business usually claims depreciation and the interest component. Terms typically run from one to seven years, and a balloon can be included.
How does hire purchase work?
The lender pays the supplier and owns the asset. Your business hires it under a written agreement, making regular instalments that cover the price and the credit charge. When the last instalment, including any balloon, is paid, ownership transfers to your business. The lender also registers its interest on the PPSR while the agreement runs.
How is it different from a chattel mortgage?
| Feature | Hire purchase | Chattel mortgage |
|---|---|---|
| Who owns the asset during the term | The lender | Your business |
| When you own it outright | When the final instalment is paid | From settlement, subject to the lender's security |
| GST on the asset price | Claimed upfront for agreements from 1 July 2012 | Claimed upfront in the BAS for the purchase period |
| GST on the interest or credit charge | Included and claimable for agreements from 1 July 2012 | None, because interest is a financial supply |
| How common it is | Offered by some lenders and dealers, long used in agriculture | The most common structure for business assets |
For many businesses the day-to-day experience is almost identical. The differences are legal ownership during the term and the GST mechanics.
How is GST claimed on a hire purchase?
The ATO treats a hire purchase as a single sale, not a series of supplies. For agreements entered into on or after 1 July 2012:
- Every component, including the credit charge and associated fees, is subject to GST.
- A business on a non-cash basis claims the full GST credit when it makes the first payment or receives a tax invoice, whichever comes first.
- A business on a cash basis can also claim the full credit upfront instead of instalment by instalment.
Older agreements, made before 1 July 2012, follow different rules, so check the agreement date if you're taking over an existing contract.
What can you deduct?
For income tax, a hire purchase is generally treated as though the business bought the asset with a loan. That usually means the business claims depreciation on the asset and a deduction for the interest component, to the extent the asset is used for business. Your accountant will confirm the treatment, especially for cars and for agreements with large balloons.
When does hire purchase make sense?
Hire purchase is often offered through dealers and manufacturers' finance arms, and it's long been common in agriculture. It can be a good fit when the price and terms are competitive, when the supplier's finance offer includes a subsidised rate, or when you want ownership to pass only once everything is paid. Your broker compares it with a chattel mortgage on total cost and flexibility.
