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Business Tax Tip – Leasing and GST – GST on lease payments

images/Tax Tips.JPGBusinesses can acquire assets such as equipment by entering into hire purchase (covered last month) or leasing agreements to pay for and use goods over a period of time rather than paying the full cost up front. Then they need to know how GST applies.

Here is some information about leasing and how GST applies from the ATO website, (which also discusses hire purchase) to assist, including links for further information -

Leasing

How does leasing work?

Leasing agreements commonly apply to goods such as vehicles, office equipment and machinery.

Under a lease agreement, the person who:

  • grants the lease (lessor) is the owner of the goods;
  • leases the goods under the lease (lessee) uses them for a specified time and, in return, makes a series of payments that can be fixed or flexible.

Do you pay GST on lease agreements?

Generally, lease agreements are subject to GST.

On each activity statement you report payments you made in that tax period for leased goods. That is, you treat each payment as though you are making a separate purchase each tax period, even though each payment is for the same goods under the same lease agreement.

(Special rules apply where you lease property to make input taxed supplies, including financial supplies. For more information about whether you can claim GST credits, refer to Claiming GST credits.)

How do you claim GST credits on lease agreements?

You can claim GST credits for any GST included in the lease charges.

If you account for GST on a non-cash (accruals) basis, you are entitled to a GST credit of one-eleventh of the lease instalments for each tax period when you do any of the following:

  • make any part of the lease payment due in that period;
  • receive an invoice from the supplier.

If you account for GST on a cash basis, you claim a GST credit of one-eleventh of the lease instalment amounts paid in each tax period.

What happens if you take ownership of goods?

At the end of the lease, you may have to pay GST on residual payments under lease agreements. These are payments you make to take ownership of the goods, which is treated as a separate transaction to the lease agreement.

If you purchase the goods at the end of the lease agreement, you may be eligible to claim a GST credit for any GST you paid in the price of the purchase.

See a working example further down the page at the ATO site HERE

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Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
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