Hire Purchase

Commonly known as Commercial Hire Purchase (CHP) or an Asset Purchase agreement, this type of finance enables the purchase of goods by means of time payment with guaranteed end ownership. The financier “purchases” the asset and then “hires” the asset to the borrower.

Te borrower makes regular (usually monthly) fixed payments and equity (ownership) increases with each payment, with an option to purchase able to given at any stage during the contract.

Overview:
Amount of Finance
  • generally from $20,000 up to 100% of the total cost (including GST)
  • borrowers have the option to contribute some form of deposit (e.g. cash or trade-in)
Term of Finance
  • generally from 1-5 years (may vary depending upon the nature of the goods)
Balloon Payment
  • may be fully amortised over the desired term, or partially amortised with a balloon payment
Repayments
  • monthly payments are fixed for the duration of the term, but can also be structured to take into account seasonal or irregular income
Nature of Goods
  • motor vehicles
  • trucks
  • plant, machinery or equipment
  • new or used
Advantages:
Conserves
  Working
  Capital
  • allows the acquisition of required capital equipment without using operating capital for funding

Flexibility
  • structure the facility with or without a balloon payment, select the length of the finance contract and structure the repayments to suit cashflow

  • cash outflow (money paid) can be varied to match cash inflow (money coming into your business) and the term of the finance contract can be matched to the expected life of the asset, ensuring that payments are not being made on equipment that is no longer contributing towards income.

Tax Treatment
  • instalments are comprised of both a “principal” and “interest” component

  • the borrower will claim the “interest” component and depreciation on the asset as deductible expenses

  • the instalment itself is not tax deductible

  • Tax detectability is determined by the extent to which goods are being used to generate assessable income

  • no GST is payable on individual loan instalments

  • from 1 July 2012, customers who account for GST on a cash basis will now be able to claim an Input Tax Credit (ITC) upfront for the GST on CHP agreements. (Previously, ITC’s needed to be apportioned progressively as each payment is made under the CHP agreement).

  • from 1 July 2012*, GST will required to be paid on the entire amount financed (excluding non taxable items), interest, fees and charges. If the GST is also financed, the total amount of the contract will increase to reflect the additional GST paid on interest charges. If the GST is financed the customer will be entitled to claim a higher ITC than if the GST is paid up front.

* This legislation does not apply to CHP agreements settled by 30 June 2012.
  • generally, Asset Purchase provides a better Tax efficiency in the initial stages of a finance term, compared to say a Lease


Since the introduction of Federal Government changes to GST calculated on Commercial Hire Purchase (CHP) agreements (new legislation effective from 1 July 2012) most clients prefer to finance by way of Chattel Mortgage.

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