What Is a Commercial Hire Purchase (CHP)?

A commercial hire purchase agreement (also known as a corporate hire purchase agreement) is a financial instrument in which the financier acquires the vehicle on behalf of the client and thereafter enters into an arrangement that allows the client to hire the vehicle over the specified term period. The client has the use of the vehicle, whilst the ownership of the asset remains the title of the financier.

The Financial Mechanics of the CHP

The financier having acquired the vehicle on behalf of the client, then hires the vehicle to the client in return for a fixed monthly repayment for the term period of the hire purchase agreement.

The monthly repayment consists of both principal and interest and transaction charge components. Only the principal component will be subject to GST. At the expiry of the hire purchase period, the client generally has an option to either pay a final residual balloon value and take ownership of the vehicle, or alternatively may use the vehicle as a means of trade-in or extend the hire purchase agreement by re-financing the residual value.

Advantages of the CHP

• Fixed repayment structure is known at inception, that is - there are fixed terms that can range from two years (24 months) to five years (60) months; fixed interest rate; fixed monthly rentals and a fixed final residual value.
• The CHP does not necessarily have to be for the full on road drive away price of the vehicle. An upfront deposit and/or cash trade-in may be applied as an offset to determine the net amount borrowed under the CHP.
• The amount financed includes the GST component in the vehicle’s purchase price and allows the borrower to claim the GST input tax credits to the extent that the vehicle is used for business purposes.
• The CHP can be structured to make advanced payments during the term period to assist in timing issues that may result in increased tax deductibility and/or help with cash flow constraints.

CHP may be suitable for:

Companies, Partnerships, Sole Traders and Business Professionals, where the vehicle is essentially used for income producing purposes and GST is accounted for in the entity’s Business Activity Statement (BAS) under an accruals method. Should the GST be accounted for on a cash basis, the entitlement to input tax credits would be to the extent of payments made for the tax period of the Business Activity Statement (BAS).

Points to note and consider:

• The principal component of the fixed monthly payment and residual balloon value will incur a GST charge. If the client is registered for GST, then the GST amounts can be claimed back on lodgement of their Business Activity Statement (BAS).
• The total interest charges under the CHP amount financed together with depreciation may be claimed as a tax deduction in the relevant tax period, subject to the Depreciation Cost limits. If the total amount financed is below the Depreciation Cost Limit, the total interest charge and depreciation is available as a tax deduction. Should the amount financed exceed the Depreciation Cost Limit, total interest charges are available as a tax deduction but depreciation would be limited to the Depreciation Cost Limit.