Commercial Hire Purchase v Chattel Mortgage

As a follow-on from last month’s newsletter, this month we focus on Commercial Hire Purchase v Chattel Mortgage on Motor vehicles.

What is a Hire Purchase?
Hire purchase finance is an agreement between you and the lender to acquire a motor vehicle for your business. During the hire period, the lender legally owns the car and you pay regular instalments to the finance company. For tax purposes you can claim depreciation, running costs and interest paid, against your business income. When you pay off the loan in full, legal ownership is then transferred to you.

What is a Chattel Mortgage?
Chattel mortgage is essentially a mortgage over goods to be financed. Chattel mortgage is classed as a cash sale in that the goods automatically become your property on purchase and the finance company takes a mortgage over the chattels. Just as a hire purchase you can claim depreciation, running costs and interest paid, against your business income. The chattel mortgage allows businesses to claim the full input tax credit from GST incurred expenses immediately (next BAS statement).

Those using their motor vehicles for business purposes can take out a hire purchase loan or chattel mortgage but will have to keep a log book and document the percentage of the vehicle use that is for business, which is tax-deductible.

The terms of both products are essentially the same, including the balloon payment at the end, but the chattel mortgage has overtaken popularity over hire purchases since the introduction of GST and the Business Activity Statement (BAS).

Here’s the twist
As of July 1 2012 new GST rules have come into play.  Customers will now pay GST on the interest charged for the hire purchase term and this GST is payable at settlement. Of course, as long as you are registered for GST and the asset being purchased is for business use, then this GST will be claimed back as an input tax credit on the next BAS so the net effect is nil.

The other important change that came into effect is that the GST can be claimed back immediately even for customers on cash accounting. Previously, if a client is on cash accounting, then the GST paid for an asset on hire purchase must be claimed progressively over the term of the hire purchase in proportion to the principle reduction made with each payment – in other words, an accountants worst nightmare.