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Business Tax Tip – GST and Hire Purchase
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Published on Friday, 23 February 2018 13:18
A business can acquire assets such as equipment by entering into hire purchase or leasing agreements to pay for and use the equipment over a period of time rather than paying the full cost up front. Then also they need to know how GST applies. Here is some information from the ATO website to explain -
How does hire purchase work?
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 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.
If you account for GST on a CASH basis
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. 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 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.
See some working examples at the ATO site HERE
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