Hire purchases, leases and their differences
Making the correct financial decisions is a difficult but integral component to running a successful business. Often, your decisions may revolve around the purchase of assets such as machinery, vehicles and property. When considering such purchases, you will likely look into terms such as hire purchases and leases. What do you know about hire purchase accounting?
Knowing the difference between a hire purchase and a lease is key to making the most financially beneficial decision for your business. Here at POP Business, we are the small business tax accounting experts!
In this blog, we’ll cover the ins and outs of both hire purchasing and leasing, and sum up their differences in practice for you.
What is a hire purchase?
Hire purchasing, or a hire purchase agreement, is a legal contract in which one party purchases a good or service by making an initial down payment (or deposit). They then pay the remaining balance in instalments, sometimes with interest.
Under a hire purchase agreement, buyers can use the good or service while paying it off, however, do not own the good or service until they have paid the final instalment. A hire purchase can also be referred to as an instalment plan.
What are the advantages and disadvantages of hire purchasing?
It is important to weigh up the advantages and disadvantages of a hire purchase agreement before making any big expense decisions for your business.
Advantages to a hire purchase agreement include:
- flexible and negotiable repayment terms (usually ranging from one year to five years),
- low deposit rates (usually under 10% of the initial good or service price),
- acting as an alternative to unsecured loans in the case that you have a low credit score, and
- fixed interest rates so that you know exactly how much you will be needing to repay.
- Claim GST credits up-front on the asset purchase
- Depreciate/expense part or the full amount of the asset
Disadvantages to a hire purchase agreement include:
- no complete ownership of the good or service until you make your last repayment,
- sellers may repossess the good or service at any point in time (before you have made a third of the total payment in the case of a motor vehicle), and
- monthly repayments may be higher than those for personal contract purchases and leases.
Instant asset write-off and GST on hire purchases
To make informed and suitable decisions, businesses need to be aware of the tax considerations that come with hire purchasing or signing a hire purchase agreement.
A hire purchase is treated the same way as a stand-alone sale in a tax period. All components of the supply of goods and services under a hire purchase agreement are subject to Goods and Services Tax (GST). Associated fees incurred while hire purchasing (such as late pa