Difference between hire purchase and chattel mortgage

Two common ways in which you can finance the purchase of a business asset, such as a new or used motor vehicle, plant and equipment or machinery is by way of a chattel mortgage or hire purchase agreement. Both methods of financing have different characteristics and it is important to understand the tax consequences of each before entering into any agreements.

Chattel Mortgage
A chattel mortgage is essentially a mortgage over business assets to be financed and is classed in a way in that the asset automatically become yours on purchase and the finance company takes a mortgage over the asset.

For tax purposes, depreciation, running costs and interest paid can be claimed and used to offset any business income. The chattel mortgage allows businesses to claim the full input tax credit from the GST incurred on the purchase of the asset immediately, such as on your next Business Activity Statement (BAS).

Who does chattel mortgage suit: A chattel mortgage is suitable for those companies, partnerships, trusts and sole traders who use the cash method of accounting (they record business income and expenses as and when they occur) as it allows them to claim the GST in the asset's price up-front. Where the customer is registered for GST, they can claim some or all of the GST contained in the asset’s price as soon as they lodge their next BAS, rather than over the term of the loan.

Hire Purchase Agreement
The hire purchase agreement is a contract where the financier gives you possession and use of a business asset in return for regular payments. When the final payment is made, the hirer will then have ownership of the asset.

As with chattel mortgages, you can also claim depreciation, running costs and interest paid against your business income.

The total amount payable under a hire purchase agreement is made up of a principal component (the price of the asset financed) and a credit component (the interest and associated fees payable). You may be able to claim the GST on the principal component of the asset in your next BAS depending on how you remit your GST.

If you account for your GST on a cash basis, you are entitled to claim GST on part of the principal component, but only to the extent of the payment that has been made. If you account for your GST on an accruals basis, you are entitled to claim the GST on the entire principal component.

Who does hire purchase suit: A hire purchase agreement is suitable for companies, partnerships, trusts and sole traders who account for GST on an accruals basis. This allows them to claim some or all of the GST contained in the asset’s price as soon as they lodge their next BAS, rather than over the term of the loan

Only the business use component can be claimed. For more information click here to register your interest or contact your accountant on (07) 5538 3088