Written byHire purchase is a finance agreement where a financier buys an asset and hires it to you for fixed instalments, with ownership passing to you at the final payment.
Also known as: commercial hire purchase, CHP, hire purchase agreement
Key points
- The financier holds title during the term; you take ownership automatically with the last instalment.
- Terms usually run one to seven years, with an optional deposit and an optional balloon payment at the end.
- GST is charged up front on the whole agreement, including the credit component, so a GST-registered business can generally claim the credit early.
- It sits between a chattel mortgage, where you own the asset outright, and a finance lease, where title never passes automatically.
How a hire purchase agreement works
The financier pays the supplier and becomes the legal owner of the asset. You take possession and use it as your own, paying fixed instalments that cover the purchase price plus interest and fees. The financier registers its interest on the Personal Property Securities Register and can take the asset back if you default.
When the final instalment (or the balloon) is paid, title transfers to you without a separate purchase step. That automatic transfer is the defining feature: a lease with an option to buy is a different arrangement.
Tax and GST treatment
For tax, you are treated as the owner from the start. You claim depreciation on the asset and the interest component of each instalment as deductions, to the extent the asset is used in the business. For cars, the depreciation you can claim is capped at the ATO car limit.
GST applies to the whole supply under the agreement, including the credit component, whether or not it is disclosed separately. A GST-registered business can generally claim the full input tax credit up front, in the BAS covering the agreement date, whether it accounts for GST on a cash or non-cash basis.
Who uses hire purchase
Hire purchase suits businesses that want to end up owning the asset, prefer fixed repayments, and are comfortable with the financier holding title until the end. It is common for trucks, trailers, plant and manufacturing equipment, and for buyers who want a deposit or balloon to shape the repayments.
If you want ownership from settlement (and the accounting treatment that goes with it), a chattel mortgage is the closer fit. If you would rather hand the asset back or upgrade regularly, look at an operating lease.
Example
A landscaping business takes a $90,000 excavator on a four-year hire purchase with a 10% deposit and no balloon. The financier buys the excavator and holds title; the business pays fixed monthly instalments, claims depreciation and the interest component, and claims the GST on the whole agreement in its next BAS. After the 48th instalment, ownership passes to the business automatically.
Not to be confused with
- Chattel mortgage
- under a chattel mortgage you own the asset from settlement; under hire purchase the financier owns it until the final payment
- Finance lease
- a finance lease never transfers ownership automatically; you can only offer to buy the asset for its residual value
Frequently asked questions
How does hire purchase work?
The financier buys the asset and hires it to you for a fixed term. You pay regular instalments that cover the price, interest and fees, use the asset as if it were yours, and take legal ownership automatically once the final instalment or balloon is paid.
What is the difference between hire purchase and a chattel mortgage?
Ownership timing. With a chattel mortgage you own the asset from settlement and the lender holds a security interest. With hire purchase the financier owns the asset until the last payment. The tax treatment is similar for a business, so the choice often comes down to lender terms and accounting preference.
Is hire purchase the same as a lease?
No. A lease is a payment for the use of an asset that the financier keeps owning, and any purchase at the end is a separate offer at the residual value. Hire purchase is a purchase paid by instalments, and title passes to you automatically with the final payment.
Can I claim GST on a hire purchase?
Generally yes, if your business is registered for GST and uses the asset for business purposes. GST applies to the whole agreement, including the credit component, and the credit is usually claimed in the BAS for that period, not spread across the instalments. Check the ATO's guidance for your circumstances.
What happens if I stop paying a hire purchase agreement?
Because the financier still owns the asset, it can repossess it after the notices required under the agreement and any consumer credit rules that apply. You may still owe any shortfall between the sale price and the outstanding balance, plus fees. Talk to the financier early if repayments become difficult.
Related terms
Broader term: Asset finance
Chattel mortgage
A chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Read definitionFinance lease
A finance lease is a lease where the financier owns the asset and your business pays to use it for most of its life, taking on the risks of ownership.
Read definitionBalloon payment
A balloon payment is a lump sum, agreed upfront, that is paid at the end of a loan term and lowers the regular repayments by deferring part of the principal.
Read definitionEquipment finance
Equipment finance is business finance used to buy or lease machinery, vehicles and other equipment, where the equipment itself secures the loan or is owned by the financier.
Read definitionAsset finance
Asset finance is the umbrella term for business finance that pays for vehicles, equipment and other income-producing assets, with the asset itself acting as the security.
Read definitionDepreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.