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Business Tax Tip – GST and Hire Purchase

images/Tax Tips.JPGInstead of paying the full price upfront for a high priced asset such as equipment or vehicle, a business can acquire assets by entering into hire purchase to pay for and use goods over a period of time – then they need to account correctly for  the GST on hire purchase and knowing how GST applies. Here is some information from the ATO website to assist, including links for further information –

From the ATO website at this current date

Under a hire purchase agreement, you:

  • Purchase goods through instalment payments;
  • Use the goods while paying for them;
  • Do not own the goods until you have paid the final instalment.

Where the supply of goods to you under a hire purchase agreement is a taxable supply, the price you pay for the goods includes GST. If you use the goods in your business, you can generally claim a GST credit.

You treat a hire purchase agreement as a stand-alone sale or purchase in a tax period – that is, the same rules apply as they would for any sale and purchase of goods under an ordinary sale agreement. A hire purchase agreement is not treated as a sale or purchase made on a progressive or periodic basis.

Paying GST on hire purchases

If you enter into a hire purchase agreement on or after 1 July 2012, all components of the supply made under the agreement are taxable, whether or not the credit component is separately disclosed. Any associated fees and charges, such as late payment fees incurred under the terms of the hire purchase arrangement, are also subject to GST.

If you enter a hire purchase agreement before 1 July 2012, and the supplier:

  • Separately identifies and discloses the interest charge to you, you don't have to pay GST on the interest as it is a financial supply;
  • Doesn't separately identify and disclose the interest charge to you, you must pay GST on the total amount payable under the contract.

The interest charge is 'disclosed' to you if the supplier tells you any of the following in the hire purchase agreement:

  • The dollar amount of the credit charge;
  • The interest rate;
  • The formula or formulas used to work out the credit charge amount;
  • Any other information sufficient to work out the credit charge amount.

A hire purchase agreement entered into before 1 July 2012 continues to be treated in this way even if there's a subsequent change to the agreement, provided the change doesn't result in a new agreement. That is, the supply of a separately disclosed credit component will continue to be an input taxed financial supply.

Claiming GST credits on hire purchases

If you account for GST on a cash basis

As all components of a hire purchase agreement entered into on or after 1 July 2012 are subject to GST, you can claim one-eleventh of all components, including the credit component and any associated fees and charges that have been subject to GST under the agreement.

For hire purchase agreements entered into on or after 1 July 2012, you can claim input tax credits up front instead of waiting until each instalment is paid, in the same way as you would if you accounted for GST on a non-cash basis.

For hire purchase agreements entered into before 1 July 2012 you can claim one-eleventh of the principal component of each instalment in the period you pay it. If the supplier provides regular accounts or statements that show the principal and interest components for each instalment, you must use that information to work out GST credits in the relevant tax period. If you don't know the principal component for each instalment, you need to take reasonable steps to find out from the supplier.

If you account for GST on a non-cash (accruals) basis

You can claim the full GST credit on your hire purchase agreement in the tax period when either:

  • You make your first payment;
  • A tax invoice is issued to you, provided you haven't already made your first payment.

For agreements entered into before 1 July 2012, you claim a GST credit only for the principal component of the agreement, not the credit component. 

Example: Hire purchase agreement entered into on or after 1 July 2012

Albert's Abattoir (Albert) is registered for GST and reports GST quarterly.

Continuing the example above, Albert decides to buy a second freezer on hire purchase from the Friendly Freezer Store (Friendly) on 20 July 2012.

Albert buys a freezer from Friendly for $33,000 through a hire purchase agreement. Under the terms of the agreement, which separately discloses the interest charge, Albert will repay $670 per month for five years. The total payment will be $40,200 ($33,000 plus $7,200 interest).

Because the agreement is entered into after 1 July 2012, both the principal and interest component of the supply are subject to GST.

The freezer is delivered on 7 August 2012 and Friendly notifies Albert that the principal component of the first instalment is $550. This means the credit component of the first instalment is $120 (670-550).

Albert can claim a GST credit for the GST included in both the price of the freezer and the interest charged. As the agreement was after 1 July 2012, the interest is not a financial supply (even though it is separately disclosed).

Whether Albert accounts for GST on a cash or non-cash basis, he can claim a GST credit of $3,654.54 (one-eleventh of $40,200) for the tax period ending 30 September 2012, as this is the period in which he pays the first instalment.

(To see a pre-1 July 2012 Example: Hire purchase agreement entered into before 1 July 2012, see the webpage.)

See also:

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