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Edited version of private ruling
Authorisation Number: 1011503126684
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Ruling
Subject: GST and Pawnbrokers
Question
Where the ownership of unclaimed goods passes to the pawnbroker automatically, is there an entitlement to input tax credits relating to pledged items less than $x inclusive of the lost interest?
Answer: No
The only instances where the pawnbroker will be entitled to input tax credits is in relation to the pawnbroker gaining ownership of unclaimed goods which were the subject of a loan under $x exclusive of the lost interest.
Relevant Facts
Your client is a second-hand dealer (pawn broker) who buys second-hand stock for re-sale and acquires stock via unredeemed pledges.
The advances are divided into 2 categories: those less than $x and those $x or more. For less than $x advances, the pledged goods becomes the property of the pawnbroker if such goods are not redeemed and the advance remains unrepaid.
The consideration of the property, on face value, is the value of the advance. However, the pawnbroker values the consideration of the goods pledged under the advance as not only the advance amount but also the lost interest on the unpaid advance.
Reasons For Decision
Subdivision 66-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) allows the pawnbroker to claim input tax credits for the acquisition of second-hand goods that are acquired for the purpose of sale or exchange in the ordinary course of business even though GST was not payable on the supply of the goods to the pawnbroker.
The GST treatment of this transaction would depend on whether or not ownership of the unclaimed goods transfers to the pawnbroker prior to the sale. In all states except for one, ownership of forfeited goods does not automatically pass to the pawnbroker. In one state, goods will become the property of the pawnbroker at the end of the loan period when the loan for the unclaimed goods is less than $x and is not repaid.
Input tax credits are available even though GST was not previously payable on the supply of the goods to the entity.
Under section 9-75 of the GST Act, the price of a supply where the consideration is expressed in monetary terms is calculated as the amount without any discount for the amount of GST (if any) payable on the supply. It is the Commissioner's view that an interest charge forms part of the consideration for a separate supply of credit rather than a supply of goods.
Therefore, a second-hand goods dealer would determine the price paid for unclaimed goods based on the principal advance paid rather than on a notional amount that includes a charge for uncollected interest. Further, under Division 40 of the GST Act, financial supplies such as the supply of credit are input taxed and do not generate an entitlement to an input tax credit.
Example:
The pawnbroker provided a loan for $35 for a pawned ring and charged interest of 20%, the loan being for 60 days. If the customer had not repaid the principal and interest at the end of the 60 days then the Pawnbroker would automatically take ownership of the ring. If no amount was paid the consideration for input tax credit would be $35. The pawnbroker is entitled to input tax credit an amount equal to 1/11 of the $35. The $7 interest would be treated as financial supply.
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