What is contract hire?

You request a quote for a make and model, a term and an annual kilometre allowance; the quote shows the monthly rental and any initial payment. The contract sets the term, typically 24 to 60 months, the permitted kilometres per year, the maintenance level, tyre and damage cover, and any insurance or roadside packages. Some contracts ask for a deposit or an initial rental of one or three months, which lowers the monthly rental but raises the upfront cost.

Rentals stay fixed for the term and are calculated from the depreciation the lessor expects (price less estimated residual), the service inclusions and the lessor's margin, so you are not paying off the full purchase price. The vehicle is delivered, serviced under the agreed schedule and, if you choose, tracked through telematics or fleet reporting. Legal title stays with the lessor throughout.

The monthly payment is made up of the depreciation component, the lessor's margin or financing cost, the maintenance and servicing package if you take a fully maintained contract, and administration fees and statutory charges such as registration where they are included in the schedule. GST is added to each rental invoice.

End-of-term charges need the closest look. Excess kilometres are charged per kilometre above the allowance, and damage beyond the contract's fair wear and tear standard is charged at handback. Early termination fees are typically significant because they reflect the lessor's loss on resale and the outstanding rentals. A residual shortfall is rare, since the lessor bears the resale risk, but some contracts include clauses for extraordinary loss or disposal costs. Check the fair wear and tear definition, whether insurance excesses and towing are covered by the maintenance package, and how safety recalls and software updates are handled.

If your business is GST-registered and uses the vehicle for business, you can generally claim input tax credits on the GST in the rentals and on certain upfront fees, following the ATO's GST rules. Rentals and running costs for business use are often deductible, subject to the usual tax rules. When employees drive contract-hired vehicles privately, FBT may apply, and contract terms such as who pays running costs can affect the FBT calculation, so keep clear records of business and private use.

For accounting, AASB 16 changed how leases are recognised: most lease arrangements now put a right-of-use asset and a lease liability on the lessee's balance sheet. The exact treatment depends on the contract terms and whether the arrangement meets the AASB 16 lease definition, so confirm it with your auditor or accountant.

Contract hire suits businesses running medium to large fleets that want predictable running costs, would rather outsource remarketing and residual risk, and like maintenance, tyres and telematics bundled with the finance. The appeal is budgeting certainty, no resale headaches, operational simplicity and the ability to refresh the fleet regularly. The drawbacks are no ownership at the end, kilometre and condition limits that can produce extra charges, a potentially higher long-term cost if you would otherwise keep vehicles past their economic life, and expensive early exits.

If eventual ownership matters, a hire purchase or finance lease fits better. For employee cars through salary packaging, see novated lease. For short-term use with no fixed term, compare hire.