One question trips people up more than any other with hire purchase: who owns the asset while you are paying it off? The answer is not you, and that single fact shapes everything else about the arrangement, from what appears on your PPSR search to what you can do with the vehicle before the final payment lands. Plenty of business owners sign a hire purchase agreement believing they have bought something. Technically, they have agreed to hire it with an option to own it later.
Short answer: Under a hire purchase agreement, the financier buys the asset and hires it to your business for a fixed term. You have full use and possession from day one, but legal ownership only transfers to you once the final instalment, including any residual, has been paid. It is sometimes called a commercial hire purchase or CHP when used for business assets.
How does a hire purchase agreement work?
The financier purchases the asset from the supplier at your direction, then hires it to your business under a fixed instalment contract. You take delivery, use the asset commercially and carry responsibility for insurance, registration and maintenance. Title passes to you automatically once you have met every obligation under the contract.
The mechanics look much like any other secured facility. You can contribute a deposit or trade-in to reduce the amount financed, choose a term generally between 12 and 84 months, and elect a residual or balloon amount payable at the end. Rates are usually fixed for the full term, which makes budgeting straightforward.
Where hire purchase differs is the legal position during the term. Because the financier holds title, you cannot sell or dispose of the asset without paying out the agreement first, and the financier’s interest is recorded on the Personal Property Securities Register.
Who owns the asset during the term?
The financier does. You hold what the law describes as possession and use, not title. The distinction becomes real if you want to trade the asset early, if a buyer runs a PPSR search, or if the business enters administration, because the asset does not belong to the business until the contract completes.
In practice this rarely causes problems for a business that intends to keep the asset for its full term. It does become relevant if your fleet turns over frequently, if you use asset equity to raise working capital, or if your accountant is trying to present a particular balance sheet position to another lender.
How is hire purchase treated for GST and tax?
Since 1 July 2012, a hire purchase entered into for business purposes has been treated as a supply of the goods at the start of the agreement. If your business is registered for GST on an accruals basis, the GST on the purchase price is generally claimable in full in the BAS period the agreement begins, rather than being spread across instalments.
The credit or term charge component of a post-2012 hire purchase is GST-free, so there is no additional GST embedded in the interest you pay. For income tax, the arrangement is treated in a similar way to a chattel mortgage: your business is generally regarded as the notional owner and may claim depreciation on the asset plus the interest component of each instalment, to the extent of business use.
Cars that fall within the ATO definition remain subject to the car cost limit, which caps both depreciation and the GST credit and is indexed each financial year. Utes with a payload above one tonne generally sit outside that cap. Confirm the current figure and your entitlements with your accountant rather than assuming.
What does a typical hire purchase structure look like?
Structure is driven by three choices: how much you contribute upfront, how long the term runs, and how large a residual you leave at the end. The residual lowers your instalments during the term but must be paid, refinanced or covered by the sale of the asset when the contract ends.
| Structure | Amount financed | Term | Residual set at | Amount payable at end of term |
|---|---|---|---|---|
| No residual | $60,000 | 60 months | 0% | Nil |
| Modest residual | $60,000 | 60 months | 20% | $12,000 |
| Higher residual | $60,000 | 48 months | 30% | $18,000 |
| Deposit plus residual | $50,000 after $10,000 deposit | 60 months | 25% | $12,500 |
Illustrative figures only, shown to demonstrate how residuals affect the end of term position. They exclude interest, fees and charges and do not represent an offer. Confirm actual figures with your lender.
The risk with an aggressive residual is straightforward: if the asset is worth less than the residual at the end of the term, you carry the shortfall. Heavy kilometre users and operators of assets that depreciate quickly should be conservative here. Our guide to balloon payments in car and equipment finance works through how to set a figure that reflects likely resale value.
How does hire purchase compare with other structures?
Hire purchase sits between a chattel mortgage and a lease. A chattel mortgage gives you title immediately with the lender holding security. A finance lease keeps title with the financier and offers no automatic transfer. Hire purchase keeps title with the financier but guarantees the transfer once you have paid.
| Hire purchase | Chattel mortgage | Finance lease | Operating lease | |
|---|---|---|---|---|
| Title during term | Financier | Your business | Financier | Financier |
| Ownership at end | Transfers automatically on final payment | Already yours | Optional purchase at residual | Asset returned |
| GST on purchase price | Generally claimable upfront on accruals | Generally claimable upfront on accruals | Claimed by financier | Claimed by financier |
| GST on term charges | GST-free for post 2012 agreements | No GST on interest | GST applies to lease rentals | GST applies to lease rentals |
| Common deductions | Interest plus depreciation | Interest plus depreciation | Lease rentals, subject to conditions | Lease rentals |
| Residual risk | Yours | Yours | Yours | Financier’s |
General comparison only. Tax and accounting treatment depends on your circumstances and the terms of the individual contract. Confirm with your lender and accountant.
For a closer look at the two structures most business owners are choosing between, see our detailed comparison of chattel mortgage vs hire purchase. If an employee packaging arrangement is also in the mix, our article on chattel mortgage vs novated lease covers that side.
Why is hire purchase less common in Australia now?
The 2012 GST changes removed the main advantage hire purchase once held over a chattel mortgage. Before that, GST on hire purchase instalments was spread across the term, which suited some cash flow positions. Once both products delivered a comparable upfront GST outcome, most borrowers preferred holding title from settlement.
Hire purchase has not disappeared. Some financiers, particularly in specialist and second tier lending, still write it, and certain asset classes and accounting preferences continue to suit the structure. It also remains relevant where a funder is more comfortable retaining title than relying on a registered security interest. If your credit history is impaired, hire purchase may be one of the structures offered, and our guide to commercial vehicle finance with bad credit covers what to expect.
What should you check in a hire purchase contract?
Business hire purchase agreements generally fall outside the National Consumer Credit Protection Act because the asset is used predominantly for business, so the consumer protections you might expect do not apply. Read the document rather than the summary sheet.
- The total amount payable across the full term, including the residual
- Whether the rate is fixed for the entire period or only an initial part of it
- Early termination and payout provisions, including any break costs
- Establishment, monthly account and end of term transfer fees
- Your obligations for insurance, maintenance and registration
- What constitutes a default and what the financier may do if one occurs
- Whether personal guarantees are required from directors
If you are financing several assets at once, structuring them under one facility rather than separate contracts can simplify both the paperwork and the reporting. Our fleet finance page explains how multi-asset arrangements are usually put together.
Hire purchase still has a legitimate place, but it deserves a side by side check against a chattel mortgage before you sign anything. Ask TYG Finance to compare both structures against the specific asset you are buying: start the conversation here.
Is hire purchase the same as rent to own?
They are related but not identical. Both involve hiring an asset with a path to ownership. Hire purchase is a credit contract with a fixed term, fixed instalments and automatic title transfer on completion. Rent to own arrangements vary widely in structure and are often more expensive over the full period.
Can I pay out a hire purchase agreement early?
Most agreements permit early payout, though break costs or an early termination fee may apply because the contract is written on a fixed rate for a fixed term. Ask for a written payout figure before you commit to selling or upgrading the asset.
What happens if I miss payments under a hire purchase?
Because the financier holds title, repossession rights are generally more direct than under a mortgage arrangement. The contract will set out what counts as a default and the notice required. Contact the financier before a payment is missed rather than after, as hardship options are easier to arrange early.
Can I claim depreciation on an asset under hire purchase?
Generally yes. For income tax purposes your business is usually treated as the notional owner of the asset, which allows depreciation claims alongside the interest component of instalments, to the extent the asset is used for business. Confirm the position for your entity with your accountant.
Does a hire purchase show on a PPSR search?
Yes. The financier’s interest in the asset is registered on the Personal Property Securities Register for the life of the agreement. Anyone searching the asset before purchase will see that interest, which is why the agreement must be paid out before the asset can be sold.