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Commercial Hire Purchase

If your business wants to own the equipment rather than rent or lease it then the most common financing arrangement is a Commercial Hire Purchase Agreement.

• Commercial Hire Purchase means a contract for the hire of goods where the hirer has the right and or the obligation to buy the goods. Ownership of the equipment is transferred to you at the end of the agreement upon payment of the final instalment or balloon amount. This finance is different to renting equipment where the borrower does not have the right to buy the goods.
•  GST is not charged on the instalments.
• You can have any amount owing at the end of the finance term. This outstanding amount is called a balloon. Examples - You can have a nil balloon, 50c, $5, $100 or $10,000 outstanding at the end. The choices are endless and make budgeting easy. By changing the balloon amounts you can change your instalments.
•  Any amount of deposit can be paid before you borrow the money. This differs to leasing as you have to lease 100% of the cost of the equipment. Commercial Hire Purchase agreements are useful when proceeds from trade-ins are used as a deposit or if you want to finance less than 100% of the cost of the equipment.
•  If you use the equipment for business purposes then the depreciation of the equipment and the interest charged are generally tax deductible (to the extent of your business use). The repayments you make are not the tax deductions. They are only a cash flow consideration.
•  A CHP agreement is fixed for the period of the loan so you know your repayments are not going to change even if interest rates rise.
•  Commercial Hire Purchase commitments are noted on the Balance Sheet of your accounts.
•  Should you want to change the equipment under finance, you will need to pay the agreement out. CHP agreements cannot be assigned to another party and are not flexible in that regard.
•  Vehicles costing more than $57,009 are known as luxury cars You can only claim depreciation to this level.
•  Repayments are calculated on the GST inclusive price of the equipment less any deposit you wish to make.

Commercial Hire Purchase v Chattel Mortgage or Commercial Loan

A Chattel mortgage or Commercial Loan (same thing) is a loan agreement where you are the owner of the equipment and you provide a charge to the financier. This is known as a bill of sale or chattel mortgage. You provide security for the loan by way of a mortgage to the financier – hence the name.

A chattel mortgage is similar to a hire purchase agreement. You still claim depreciation and interest charges as you would for a hire purchase agreement. A chattel mortgage might be preferred over a hire purchase agreement when the borrower accounts for GST on a cash basis. This enables the borrower to claim the GST input tax credit at the time of purchase provided they are registered for GST and are entitled to claim this input tax credit. Otherwise the borrower would have to claim the GST over the period of the loan.

For borrowers on an accrual basis of accounting (non-cash) most choose a CHP agreement as they can claim the input tax credit from the hire purchase agreement itself provided they are registered for GST and are entitled to claim this input tax credit.

• Chattel mortgages attract upfront fees to register this security. Chattel mortgage stamp duty still applies