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Business Financials – How do you claim GST on Hire Purchases?
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Published on Friday, 01 July 2016 09:32
From 1 July 2012, both Accrual AND Cash reporters can claim the FULL GST upfront on the first payment of all Hire Purchase arrangements. Division 158 introduces this in the GST Act, allowing Businesses to account for GST on a cash basis.
Under a Hire Purchase (HP) equipment or assets are obtained by hiring the item over the repayment term, where upon the final payment, ownership is transferred to you or the business. A fixed amount of interest is agreed/offered and depreciation can be claimed. A balloon payment can be included. Before 1 July 2012, HP was best suited to businesses on accrual basis, and Chattel Mortgage (CM) for those on cash basis reporting. Now the similarities between the tax benefits of HP and CM are much closer.
The ATO website explains -
- 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 periods when either:
- you make your first payment
- if before making your first payment, a tax invoice is issued to you.
· If you account for GST on a cash basis
For hire purchase agreements entered into before 1 July 2012 you may 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 do not know the principal component for each instalment, you need to take reasonable steps to find out from the supplier.
For hire purchase agreements entered into on or after 1 July 2012, you may claim input tax credits upfront 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. As mentioned above, all components of the supply made under a hire purchase agreement entered into on or after 1 July 2012 will be subject to GST. You may claim one-eleventh of all components, including the credit component and any associated fees and charges which have been subject to GST under the agreement.
- Example – hire purchase agreement entered into AFTER 1 July 2012
Albert's Abattoir (Albert):
- is registered for GST
- uses quarterly tax periods for GST reporting.
Albert decides to buy a second freezer on hire purchase from Friendly, on the same terms as above, on 20 July 2012. Because the agreement was entered into after 1 July 2012, both the principal and interest component of the supply made 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 that the credit component of the first instalment was $120.
Albert claims a GST credit for the GST included in the price of the freezer and a GST credit for the GST included in the interest charged, because this is no longer a financial supply, even though the interest is separately disclosed.
Regardless of 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.
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