Quick answer
Hire purchase is an agreement where a financier buys an asset and hires it to your business for regular instalments. Ownership passes to your business when the final payment is made. In the meantime you use the asset, and for tax purposes the arrangement is generally treated like a purchase funded by a loan, so you can usually claim depreciation and the interest component, and claim the GST credit upfront.
Key points
- The financier owns the asset until the last instalment is paid
- For income tax, it's generally treated as if you bought the asset with a loan
- Since 1 July 2012, GST credits on hire purchase can be claimed upfront, including by cash-basis businesses
- Very close to a chattel mortgage in practice; the key difference is when title passes
Under a hire purchase, a business gets the use of an asset immediately and works its way to owning it. A financier buys the oven, ute or excavator, hires it to you for a fixed series of instalments, and transfers title once the final payment clears. Until then, the financier is the legal owner.
The name is fairly literal: you hire the item, and the hire turns into a purchase at the end. business.gov.au describes it in similar terms, as a way to get an asset for your business and pay it off in instalments with interest.
How hire purchase is treated for tax and GST
This is where hire purchase gets interesting, because the tax rules look through the legal ownership.
Income tax. For tax purposes, a hire purchase is generally treated as though the financier sold the asset to you and lent you the price. That means your business can usually claim depreciation on the asset, and deduct the interest component of each instalment, even though it isn’t yet the legal owner.
GST. For hire purchase contracts signed on or after 1 July 2012, the ATO allows the GST credit on the asset to be claimed upfront, rather than spread across the instalments. That applies to businesses accounting for GST on a cash basis as well as on an accruals basis. On a $45k asset, that’s about $4,091 back in one BAS instead of a trickle over several years.
Both points are worth confirming with your accountant for your own situation, especially where the asset has private use.
Hire purchase vs the alternatives
| Hire purchase | Chattel mortgage | Finance lease | |
|---|---|---|---|
| Who holds title while you pay | Financier | Your business | Financier |
| When ownership is yours | After the final instalment | From settlement | Only if you pay the residual and buy it |
| GST credit | Upfront | Upfront | Spread across rentals |
| Depreciation claimed by | Your business | Your business | Financier |
Hire purchase and chattel mortgage end up so similar in practice that many financiers will offer either. For a deeper look, see chattel mortgage vs hire purchase.
Need a hire purchase quote on new equipment? Send us the details and we’ll take a look.
Example: a bakery’s new deck oven
A suburban bakery needs a $45k deck oven to keep up with wholesale orders for local cafés. The owner signs a four-year hire purchase with no deposit and a modest final balloon.
- The financier pays the supplier and holds title, registering its interest on the PPSR.
- In the next BAS, the bakery claims the GST credit on the oven, roughly $4,091, which helps with cash flow during installation.
- Each year the bakery claims depreciation on the oven and deducts the interest part of its instalments.
- When the last payment is made in year four, ownership transfers and the PPSR registration is removed.
Bakers comparing other ways to fund ovens, mixers or a second shop can find more on our bakery finance page, and the equipment finance calculator will show what the instalments might look like.
Related terms
Equipment finance, chattel, residual value, lease and security interest.
Ready to get the equipment and pay it off over time?
When a machine is going to earn its keep for years, it often makes sense to fund it over those years rather than drain the bank account. We can help work out whether hire purchase or another structure suits your business best. Putting in an enquiry takes about a minute and has no effect on your credit rating. Your details go to us, not to a long line of finance companies, and someone on our team reads them before picking up the phone. Fill it in with the asset, price and supplier as they really are, so the match we come back with fits on the first try.
Frequently asked questions
What's the difference between hire purchase and a chattel mortgage?
Under a chattel mortgage, your business owns the asset from the start and the lender holds a mortgage over it. Under hire purchase, the financier keeps ownership until the final instalment. In practice the repayments, GST timing and tax treatment end up very similar.
Can a hire purchase have a balloon payment?
Yes. Many agreements include a final lump sum to lower the regular instalments. Ownership passes once that last payment is made.
Can I claim depreciation on something I don't own yet?
Generally yes. Tax law treats a hire purchase as a notional sale to you, funded by a notional loan, so you're treated as the owner for depreciation and can deduct the interest component. Your accountant can confirm how it applies to your asset.
What happens if I stop paying?
Because the financier still owns the asset, it can repossess and sell it under the agreement's terms. If the sale doesn't cover what's owed, your business may still be liable for the shortfall.
Is hire purchase only for vehicles?
No. It's used for vehicles, but also for machinery, kitchen equipment, medical devices, IT hardware and other tangible business assets.