1.2. Which component of a hire purchase agreement entered into before 1 July 2012 is a financial supply and which component is subject to GST?
Non-interpretative – other references:
- paragraph 80 of GSTR 2004/4External Link - Goods and services tax: assignment of payment streams including under a typical securitisation arrangement
- line numbers C24 and C25 of GSTR 2002/2External Link - Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions.
Under amendments made to the GST Regulations which became effective from 1 July 2012, the supply of the credit component will no longer be treated as a financial supply. This applies to all hire purchase agreements entered into from 1 July 2012. For hire purchase agreements entered into before 1 July 2012 the previously existing rules apply.
End of attention
The total amount payable by a recipient under a hire purchase agreement is typically made up of a principal component (that is, the amount financed) and a credit component (that is, the terms and charges). The principal component usually represents the price of the goods financed and the credit component represents the interest and associated fees and charges payable by the recipient.
Sometimes the amount financed under a hire purchase agreement includes other amounts such as registration, stamp duty and insurance which are paid by the financier on behalf of the recipient. These are not taxable supplies made by the financier to the recipient.
GST is payable on the amount of the principal component represented by the taxable supply of goods under the agreement. For hire purchase agreements entered into before 1 July 2012 the credit component will not be subject to GST if it is provided separately and disclosed to the recipient of the goods under item 8 in the table in subregulation 40-5.09(3) of the GST Regulations.
The charge is ‘disclosed’ to the recipient of the goods for the purpose of item 8 if in the hire purchase agreement:
- the dollar amount of the credit charge
- the interest rate
- the formulas used to calculate the amount of the credit charge, or
- any other relevant information sufficient to work out the amount of the credit charge.
is made known to the recipient.
Therefore, even in the period up until 30 June 2012 if the credit component is not disclosed to the recipient, the entire hire purchase agreement (principal and credit) is subject to GST.
Under the new law all supplies of goods or credit made under a hire purchase agreement entered into on or after 1 July 2012 are fully taxable regardless of whether the interest charge is separately identified and disclosed.
This new law will not impact on amendments made on or after 1 July 2012 to an existing hire purchase agreement entered into before 1 July 2012 if the amendments do not give rise to a new hire purchase agreement.