Commercial Hire Purchase

What is a Commercial Hire Purchase?

A Commercial Hire Purchase is a type of business car finance where the financier agrees to purchase the vehicle on behalf of the customer. In return, the customer hires it back from the financier by making set monthly repayments for a certain period of time. The term of the contract normally ranges from 12 to 60 months.
Oftentimes, Commercial Hire Purchase may also be referred to as a Corporate Hire Purchase, Hire Purchase, Asset Purchase or Term Purchase and is commonly abbreviated as CHP or HP. regardless of how many different names it’s identified with, a Commercial Hire Purchase is on average one of the most widely known Car Leasing option used throughout Australia. Compare car finance and save on a commercial hire purchase by shopping around for a good deal.
How does a Commercial Hire Purchase work?
The Commercial Hire Purchase agreement is what is known as a contract between the finance provider and the customer where the financier allows the customer to gain possession and the use of the vehicle and use it as desired. The customer in return will have to pay some regular fixed monthly repayments for the entire duration of the contract.
The customer will only acquire full ownership of the vehicle after a final payment or balloon has been made. The title of the vehicle remains with the finance provider until the vehicle is paid in full.
It is mainly suitable for organizations using the 'accruals' method of accounting for the Goods and Services Tax (GST) or for those people who use their vehicle for business related purposes. Under the 'accruals' method, the GST component of the acquisition price of the vehicle can be claimed back on the entity's next Business Activity Statement (BAS), rather than claiming the GST over the term of the finance contract. The depreciation of the goods is fully tax deductible providing goods are used solely for business purposes.
Benefits of a Commercial Hire Purchase
A Commercial Hire Purchase is beneficial for both companies and individuals and has many attractions. Some of the benefits include:
• Flexible terms ranging from 12 to 60 months
• GST will not be charged on the monthly repayment or balloon payment
• Depreciation on the motor vehicle and the interest component of the rental are tax deductible if it is used to generate income or the expense is required in carrying on a business
• Fixed interest rate and monthly repayments for the term of the Commercial Hire Purchase
• If you registered for GST, you can claim the GST on the vehicle price
• A Commercial Hire Purchase can be structured to have no deposit.
Taxation Implications of a Commercial Hire Purchase
A Commercial Hire Purchase allows a GST registered customer to claim an input tax credit for the GST component of the purchase price. If the accrual accounting method is being used by the customer, the input tax credit may be claimed on the next Business Activity Statement (BAS). On the other hand, the GST can be claimed as an input tax credit over the term of the Commercial Hire Purchase contract if the cash method of accounting is used.
The customer may claim depreciation on the motor vehicle and a tax deduction is available when the vehicle is used for business purposes
GST is not charged on the monthly repayment or balloon payment
Terms and Balloons of a Commercial Hire Purchase
These are the standard terms and balloons.
• 5 year/ 30% balloon
• 4 year/ 40% balloon
• 3 year/ 50% balloon
• 2 year/ 55% balloon
Note: the balloon is an option and in most cases can be varied depending on your circumstances