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Business Tax Tip – GST on Hire Purchase – How to claim, and tax treatment
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Published on Thursday, 27 April 2023 11:08
When your business purchases a high-value asset, it can either pay:
- The full price upfront such as for equipment or a vehicle; or
- Can purchase by entering into hire purchase to pay for and use goods over a period of time.
It’s important to account correctly and claim the GST on hire purchase, which is claimable at the TIME of purchase, whether you account for GST on cash or accrual basis.
Here is some information from the ATO website at this current date for the tax treatment, including links for further information –
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, GST applies differently, see the ATO page for details.
Claiming GST credits on hire purchases – cash or accrual accounting
1. 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.
2. 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; or
- A tax invoice is issued to you, provided you haven’t already made your first payment.
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 Friendly, …on 20 July 2012.
Albert buys a freezer from the Friendly Freezer Store (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.
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