• Hire purchase, leasing and GST

    Many businesses enter into hire purchase or leasing agreements to pay for and use goods over a period of time rather than paying the full cost up front.

    Hire purchase

    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.

    See also:

    Do you pay GST on hire purchases?

    For a hire purchase agreement entered into before 1 July 2012

    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 may be able to claim a GST credit for any GST included in the purchase price of the goods.

    See also:

    Next steps:

    If the supplier:

    • separately identifies and discloses the interest charge to you, you do not have to pay GST on the interest as it is for a financial supply
    • does not 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 enough to work out the credit charge amount.

    For a hire purchase agreement entered into on or after 1 July 2012

    All components of the supply made under a hire purchase agreement entered into on or after 1 July 2012 are taxable regardless of whether 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, will also be subject to GST.

    A change to an existing hire purchase agreement entered into before 1 July 2012 that does not result in a new agreement is not affected by the new rules. That is, the supply of a separately disclosed credit component will continue to be an input taxed financial supply.

    Hire purchase agreement not treated as a progressive or periodic supply

    Do not treat a hire purchase agreement as a sale or purchase you make on a progressive or periodic basis. Treat a hire purchase agreement as a stand-alone sale or purchase in a tax period – so, the same rules apply as they would for any sale and purchase of goods under an ordinary sale agreement.

    See also:

    How do you claim 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 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 BEFORE 1 July 2012

    Albert's Abattoir (Albert):

    • is registered for GST
    • uses quarterly tax periods for GST reporting.

    On 10 June 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).

    The freezer is delivered on 7 April and Friendly notifies Albert that the principal component of the first instalment is $550. Albert claims a GST credit for GST included in the price of the freezer. However, Friendly does not charge GST on the interest component as it is a financial supply so Albert cannot claim a GST credit on this component.

    If Albert accounts for GST on a non-cash basis he claims a GST credit for the tax period in which he enters into the agreement. Accordingly, for the tax period ending 30 June Albert claims a GST credit of $3,000 (one-eleventh of $33,000).

    If Albert accounts for GST on a cash basis he could have claimed a GST credit of only $50 (one-eleventh of $550) for the first instalment in the tax period he actually pays the instalment.

    End of example

     

    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.

    End of example

    Under the new rules for claiming GST credits on hire purchase agreements entered into on or after 1 July 2012, entities accounting for GST on a cash basis may claim the GST credit on a hire purchase transaction in the same way as if they accounted for GST on a non-cash basis.

    See also:

    Leasing

    How does leasing work?

    Leasing agreements commonly apply to goods such as vehicles, office equipment and machinery.

    Under a lease agreement, the person who:

    • grants the lease (lessor) is the owner of the goods
    • leases the goods under the lease (lessee) uses them for a specified time and, in return, makes a series of payments that can be fixed or flexible.

    Do you pay GST on lease agreements?

    Generally, lease agreements are subject to GST.

    On each activity statement, you must report payments you make for goods under a lease agreement that extends over a number of tax periods. That is, you treat each payment as though you are making a separate purchase each tax period, even though each payment is for the same goods under the same lease agreement.

    See also:

    • Special rules apply where you lease property to make input taxed supplies, including financial supplies. For more information about whether you can claim GST credits, refer to Claiming GST credits.

    How do you claim GST credits on lease agreements?

    You may be able to claim GST credits for any GST included in the lease charges.

    If you account for GST on a non-cash (accruals) basis, you are entitled to a GST credit of one-eleventh of the lease instalments for each tax period when you do any of the following:

    • make any part of the lease payment due in that period
    • receive an invoice from the supplier.

    If you account for GST on a cash basis, you claim a GST credit of one-eleventh of the lease instalment amounts paid in each tax period.

    What happens if you take ownership of goods?

    At the end of the lease, you may have to pay GST on residual payments under lease agreements. These are payments you make to take ownership of the goods, which is treated as a separate transaction to the lease agreement.

    If you purchase the goods at the end of the lease agreement, you may be eligible to claim a GST credit for any GST you paid in the price of the purchase.

    Example – claiming GST credits on lease agreements

    Melinda's Speedy Pastry (Melinda) decides to lease a cash register and makes an agreement with QED Finance.

    Melinda accounts for GST on a non-cash basis. QED Finance leases the register to Melinda for $220 a month over a period of three years.

    As Melinda obtained the cash register under a lease agreement, each lease payment is treated as though she is making a separate purchase for the register each tax period, even though each payment is for the same register under the same lease agreement.

    The GST credit is one-eleventh of the monthly lease payments ($220), which is $20.

    Melinda can claim this credit, provided she pays at least part of the $220 in that period. If she does not pay any part of the $220 in the period, she may only claim the $20 credit only if QED Finance issues her with a monthly invoice, based on the terms of the lease agreement.

    If Melinda accounted for GST on a cash basis, the GST credit would be based on one-eleventh of the lease payments she actually made in each tax period.

    At the end of the lease, Melinda returns the register to QED Finance.

    If, however, Melinda purchased the register from QED Finance at the end of the lease agreement to continue using it for the business, she could claim GST credits on the amount of GST included in the purchase price of the register.

    End of example

    See also:

    • GSTR 2000/29 Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25 (paragraphs 190 to 217).
    • GSTR 2000/35 Goods and services tax: Division 156- supplies and acquisitions made on a progressive or periodic basis (paragraphs 190 to 217).

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      Last modified: 10 Nov 2015QC 16282