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A hire-purchase agreement allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. The buyer, who has the use of the goods, is not the legal owner during the term of the hire-purchase contract. Hire purchase is frequently advantageous to consumers because it spreads the cost of an expensive item over an extended period of time. Business consumers may find the different balance sheet and taxation treatment of hire-purchased goods beneficial to their taxable income. Please refer to the ATO at: www.ato.gov.au/businesses for further information.
 

 
Residual/Balloon: You can choose to have a balloon payment as the last payment of your finance agreement. This balloon payment is usually between 10% – 40% of the cost price, but may be as low as one dollar, depending on the equipment. This decision is usually influenced by the level of monthly payments you are comfortable with.
 
Accounting Benefits: For income tax and GST purposes, a hire purchase agreement is treated very differently to a finance or operating lease. Under GST, a hire purchase agreement is treated as a ‘taxable supply’ on the commencement of the arrangement between the hirer and the financier.
 
With a hire purchase arrangement, there is deemed to be a sale of the equipment from the financier to the hirer, the GST liability arises at the commencement of the arrangement. Even though the total amount payable under the agreement will be paid by periodic installments, ownership of the equipment will not pass to the hirer until the final repayment. The financier, being the supplier, is responsible for the payment of the GST liability. Therefore the amount financed is inclusive of GST, and your monthly repayments are not subject to GST unless you are on a cash basis for GST. (Seek advice from your accountant). You can claim the interest component of all repayments. The depreciation of the goods is tax deductible providing goods are used 100% for business purposes. The goods you buy become assets that show on the balance sheet of your business. The goods will also be a contingent liability until the end of the finance agreement. You may be liable to pay fringe benefits tax and should refer to the ATO at: www.ato.gov.au/businesses for further information. You should always seek advice from your accountant on the rules and how they apply to your particular business and equipment.
 
Term: The term of finance agreement can be from 1 to 5 years
 

Commercial Hire Purchase

Hire purchase is similar to leasing except that the item is seen to be owned by the borrower. This means that only the interest payments made on the purchase are tax deductible. Depreciation is also allowed as a tax deduction. The interest rates on both hire purchase and lease are fixed for the term of the agreement.