What is a conditional sale?

The parties agree price, payment schedule, retention of title clause, warranties and delivery terms, then sign and the goods are delivered. The condition is usually final payment, though it can be a fixed date or meeting obligations such as maintenance. Through the conditional period the buyer has use and possession while the seller keeps title, and the contract says who bears risk and who must insure the goods.

When the condition is met, for example the final instalment is paid, title transfers automatically or on the buyer's request. If the buyer defaults, the seller typically has remedies: repossession, termination and keeping payments as liquidated damages, subject to reasonableness and consumer credit law. On transfer the buyer owns the goods outright.

A well-drafted agreement covers retention of title and the transfer mechanism; the payment schedule and whether early payment brings title forward; risk, insurance and loss; default, notice and cure periods and the seller's repossession rights; warranties; GST invoicing and supply timing; buyer insolvency; and serial numbers or VINs identifying the goods.

Under the PPSA a conditional sale is a security interest, and because it secures the purchase price it is a purchase money security interest. PMSI super-priority is not automatic: it depends on registering on the PPSR within the PPSA time limits, which differ for inventory and other goods. An unperfected interest ranks behind perfected secured creditors and vests in the buyer itself if an administrator is appointed or the buyer is wound up, so the seller loses the goods and ranks as an unsecured creditor. Registration needs a clear collateral description and the correct debtor name. Where the buyer is an individual buying for personal, domestic or household use, the contract may be regulated consumer credit.

Whether the taxable supply happens at signing, delivery or transfer of title depends on the contract terms and the ATO's view of the transaction. The buyer can claim input tax credits once it holds a valid tax invoice and the acquisition is for a creditable purpose, so the contract should say when the invoice is issued.

For tax, a sale of goods by instalments with title passing on the final payment is generally treated as a notional sale and loan: the buyer is treated as holding the asset and claims decline in value from the start, plus the finance charge in each payment, while the seller is treated as having sold. For accounting, substance over form applies: if the risks and rewards of ownership have passed despite retained title, the buyer may need to recognise the asset and a related liability. Check the treatment with your accountant.

A hire purchase is close, but usually includes an explicit transfer of ownership on the last payment and may be classified differently for accounting. A finance lease is a lease rather than a sale, with the lessor keeping title. A chattel mortgage gives the buyer title immediately, subject to the lender's mortgage, the reverse of a conditional sale.

Conditional sales are common for equipment and machinery sold on deferred payment and for vehicle and fleet sales with a final balloon payment. Buyers get the goods without paying in full upfront; sellers keep security until they are paid. The trade-offs for buyers are repossession risk, uncertainty about GST credit timing, and difficulty selling or borrowing against goods they do not yet own.