ATO Interpretative Decision
ATO ID 2013/51
Goods and Services TaxGST and decreasing adjustments when a hire purchase agreement is terminated due to default
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Does the entity, a supplier under a hire purchase agreement, have an adjustment under section 19-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when it exercises its right to terminate the hire purchase agreement due to default and the outstanding instalments are no longer payable?
Yes, the entity has an adjustment under section 19-40 of the GST Act. This adjustment is a decreasing adjustment within the meaning of that term in section 19-55 of the GST Act.
The entity enters into a hire purchase agreement on or after 1 July 2012 with a customer for the supply of goods. The agreement separately discloses credit charges. Under the hire purchase agreement, the entity makes two supplies, being a taxable supply of goods and a taxable supply of credit. Payments for these supplies are made to the entity in instalments.
The entity is registered for goods and services tax (GST).
The entity does not account for GST on a cash basis.
The entity has attributed the GST payable on the supplies of the goods and credit under the hire purchase agreement to an earlier tax period.
In a later tax period, there is a genuine dispute between the parties, the hirer defaults and the entity exercises its right to terminate the hire purchase agreement. The entity has the right to repossess the goods and sell or re-hire them. Amounts in arrears up to the date of termination remain payable.
Under the hire purchase agreement, the future outstanding instalments are no longer payable. To compensate the entity for any loss under the hire purchase agreement the entity is entitled to a termination amount. The termination amount is the discounted future outstanding amounts reduced by the net proceeds of resale or rehiring.
These events are illustrated in the following diagram. This ATO ID addresses event (3):
Reasons for Decision
Section 19-40 of the GST Act provides that an entity has an adjustment for a supply for which it is liable to pay GST if:
- in relation to the supply, one or more adjustment events occur during a tax period;
- GST on the supply was attributable to an earlier tax period, and
- as a result of those adjustment events, the previously attributed GST amount for the supply no longer reflects the amount of GST on the supply, taking into account any change in circumstances that has given rise to the adjustment event(s).
Under paragraph 19-10(1)(b) of the GST Act, an adjustment event is an event that has the effect of changing the consideration for a supply.
With the termination of the hire purchase agreement, the entity is no longer entitled to the future instalments that would have become due and payable if the agreement was still on foot.
Consequently, the consideration for the supplies of goods and credit made under the hire purchase agreement is reduced as the future instalments are no longer consideration for these supplies. Change in consideration for the supplies of goods and credit is an adjustment event under paragraph 19-10(1)(b) of the GST Act.
This is consistent with paragraph 216 of Goods and Services Tax Ruling GSTR 2000/29 which provides that the repossession of goods under a hire purchase agreement is an adjustment event and adjustments may be required under Division 19 of the GST Act.
As a result of the adjustment event, the previously attributed GST for the supplies is no longer an accurate reflection of the consideration for the supplies.
As all the requirements in section 19-40 of the GST Act are met, the entity has an adjustment under section 19-40 of the GST Act when it exercises its right to terminate the hire purchase agreement due to default. As the corrected GST amount is less that the previously attributed GST amount, the adjustment is a decreasing adjustment within the meaning of that term in section 19-55.
Note : The termination amount is payable in respect of damages and the payment is not a consideration for a supply and hence is not taken into account in determining the corrected GST amount. See ATO ID 2013/52).Date of decision: 12 September 2013
Related Public Rulings (including Determinations)
ATO ID 2013/52
ATO ID 2006/4
goods and services tax
GST hire purchase
GST net amounts & adjustments