Edited version of private ruling

Authorisation Number: 1011749882565

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Ruling

Subject: GST and entitlement to Subdivision 66-A input tax credits

Question

Are you entitled to an input tax credit for a creditable acquisition of the second-hand goods?

Answer

No.

Relevant facts

Entity A is the GST group representative for Entity B and has been from a date later than 1 July 2000.

Entity B was also registered for GST as a non-resident company for a single tax period which was earlier than its membership of the GST group.

You advise that Entity B in the course of carrying on its enterprise of the leasing and sale of second-hand goods as a non-resident company acquired outside of Australia second-hand goods with the intention to lease and sell.

The second-hand goods were subsequently sold to Australian entities as taxable supplies.

You are now seeking to claim a GST credit under Subdivision 66-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

The detail pertaining to the second-hand goods is as follows:

Second-hand good C (Good C)

Good C was originally sold by Entity C to Entity B prior to 1 July 2000.

· After this date but prior to 1 July 2000 Entity B entered into an agreement with another entity (Entity D) to sell and leaseback Good.C.

· The sale of Good C to Entity D and subsequent leaseback took place prior to 1 July 2000.

· The lease from Entity D to Entity B provided for an option to purchase Good C at the end of the lease term. You advise that this was a hire purchase agreement. You also advise that the time of the acquisition Good C was second-hand as they had been previously owned and used. You also advise that no GST was charged to Entity B by Entity D as the transaction took place prior to the introduction of GST.

· Entity B onward leased Good C to another entity (Entity E) which sub-leased Good C to another entity (Entity F). You advise that Entity F acted as the importer of Good C into Australia after 1 July 2000.

· Under the terms of the 'Hire Purchase/lease agreement, the full title in Good C transferred from Entity D to Entity B after 1 July 2000. Good C was located in Australia at the time of the title being transferred to Entity B. Neither Entity D nor Entity C accounted for GST in respect of the title transfer on the basis that the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes in respect of hire purchase arrangements.

· Entity B onward sold Good C to Entity E after this, while Good C was in Australia. As Entity B and Entity E were members of the same GST group at the time of the sale, no GST was accounted for on the sale.

· Entity E then sold Good C to Entity F. GST was accounted for by Entity F via a reverse charge in accordance with Division 83 of the GST Act.

Second-hand good D (Good D)

· Good D was originally sold by Entity C to Entity D prior to 1 July 2000.

· On the same date, Entity D leased Good D to Entity B. The lease provided for an option for Entity B to purchase Good D at the end of the lease term. You advise that this was a hire purchase agreement. At the time of the acquisition Good D was second-hand as it had been previously owned and used. You also advise that no GST was charged to Entity B on the acquisition as the transaction took place prior to the introduction of GST.

· Entity B onward leased Good D to Entity E which sub-leased Good D to Entity F. You advise that Entity F acted as the importer of the Good D into Australia after 1 July 2000.

· Under the terms of the 'Hire Purchase/lease agreement, the full title in Good D transferred from Entity D to Entity B after 1 July 2000. Good D was located in Australia at the time of the title being transferred. Neither Entity D nor Entity B accounted for GST in respect of the title transfer on the basis that the relevant supply and acquisition occurred prior to 1 July 2000 for GST purposes in respect of hire purchase arrangements.

· Entity B onward sold Good D to Entity E after this, while Good D was in Australia. As they were members of the same GST group at the time of the sale, no GST was accounted for on the sale.

· Entity E then sold Good D to Entity F. GST was accounted for by Entity F via a reverse charge in accordance with Division 83 of the GST Act.

You are intending to claim input tax credits in the amount of $X for the second-hand goods.

For the second-hand goods you have provided a copy of the relevant lease agreements between Entity D and Entity B and yourself.

The agreements are essentially the same with no material differences.

Good C Lease Agreement - Relevant extracts

A section deals with basic rent.

A further section is about Adjustment of rent and refers to the net economic return, stipulated loss values and termination values.

A third section is about options to purchase.

Good D Lease Agreement - Relevant extracts

A section deals with basic rent.

A further section is about Adjustment of rent and refers to the net economic return, stipulated loss values and termination values.

A third section is about options to purchase.

As agreed with your representative we are not to consider the attribution question where entitlement to the input tax credits does not arise.

Reasons for decision

Summary

In the present case the second-hand goods were acquired under the hire purchase agreements by Entity B prior to 1 July 2000. As such section 18 of the A New tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) applies. Under section 18 of the GST Transition Act entitlement to input tax credits is available if the second-hand goods as at 1 July 2000 were held for the purposes of sale or exchange and had not previously been held for any other purpose. You held the second-hand goods for another purpose namely leasing.

Detailed reasoning

Section 18 of the GST Transition Act provides that Division 66 of the GST Act applies to second-hand goods acquired before 1 July 2000 if certain conditions are satisfied. Where these conditions are satisfied entitlement to an input tax credit arises.

Subsection 18(1) of the GST Transition Act states:

Division 66 of the GST Act applies to second-hand goods you acquired before 1 July 2000 only if:

(a) you held them at the start of that day for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business; and

(b) you had not previously held them for any other purpose.

The aim of section 18 of the GST Transition Act is to allow an input tax credits if the second-hand goods have been held for sale and to deny an input tax credit if they have been held for any other purpose.

Second-hand goods

We consider Goods C and D to be second-hand goods at the time of acquisition for the purposes of this provision.

Acquisition prior to 1 July 2000

You have advised that the second-hand goods were purchased under a Hire Purchase (HP) agreement.

If the Lease Agreements are HP agreements section 18 of the GST Transition Act will be engaged.

Therefore, we need to determine if the Lease Agreements constitute a lease or HP agreement.

Lease or hire purchase

'Lease' is not defined in the GST Act. However, paragraph 2 of Goods and Services Tax Determination GSTD 2001/2 explains generally that lease agreements provide for the lessee to use goods for the term of the lease for consideration in the form of periodic payments.

The key difference between a lease and a hire purchase agreement has long been recognised in an income tax context as the absence or presence of an option to purchase the relevant goods. For example Taxation Ruling IT 28 states that a lease which provides the lessee with an option to purchase the leased goods will be treated as a contract for the sale of the goods. This position was confirmed in Taxation Ruling IT 2051.

The GST Act picks up the income tax distinction between a lease and a hire purchase agreement. For the purposes of the GST Act, 'hire purchase agreement' in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) means:

(a) a contract for the hire of goods where:

(i) the hirer has the right, obligation or contingent obligation to buy the goods; and

Note: An example of a contingent obligation is a put option.

(ii) the charge that is or may be made for the hire, together with other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods; and

(iii) title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised; or

(a) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid.

In summary, paragraph 3 in Goods and Services Tax Determination 2001/2 explains that where the lessee has the right or obligation to purchase the goods, the agreement would be a hire purchase agreement rather than a lease agreement. For GST purposes a hire purchase agreement is treated as a sale of goods and a separate supply of finance.

Where the parties have entered into a HP agreement that agreement will be treated as a contract for the sale of goods and consequently in the present case the second-hand goods will be considered to have been acquired by Entity B prior to 1 July 2000.

In this case, the arrangement involves a Lease Agreement over second-hand goods. The Lease Agreements provide that Entity B as lessee can use the second-hand goods for the term of the lease for consideration in the form of semi-annual payments. As such, the Lease Agreements superficially appear to be a lease.

However, a section in of both Lease Agreements contains an express purchase option. We consider that this option satisfies subparagraph 995-1(a)(i) of the ITAA 1997.

In respect of subparagraph 995-1(a)(ii), of the ITAA 1997 we consider that this element is satisfied.

That is under the Lease Agreements for the second-hand goods the charge for the hire exceeds that the price of the goods. This is supported under a section of the Lease agreements where reference is made to the maintenance of the Lessor's net economic return and in respect of the termination value under another section.

We are satisfied that both Lease Agreements satisfy subparagraph 995-1(a)(ii) since there is an increase in the original sale price of the items under the Lease Agreements.

A section in both Lease Agreements provides that title to and ownership of the second-hand goods shall pass from the Lessor to the Lessee on the date of the expiration of the basic term. This section satisfies subparagraph 995-1(a)(iii).

As the Lease Agreement satisfies all the relevant requirements, the Lease Agreement is a 'hire purchase agreement' rather than a lease for GST purposes.

We consider that the contracts were HP agreements and as such the second-hand goods for GST purposes were acquired by you by you prior to 1 July 2000.

You held them at the start of that day for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business

Whether the second-hand goods were held at 1 July 2000 for the purposes of sale or exchange is modified by paragraph 18(1)(b) of the GST Transition Act.

Not previously held for any other purpose

Paragraph 18(1)(b) of the GST Transition Act requires that the second-hand goods held for the purposes of sale and exchange as at 1 July 2000 must not have previously been held for any other purpose.

The purpose of this paragraph is to exclude access to the input tax credits if the goods have at any time have been held for any other purpose other than for sale or exchange.

In the present case the second-hand goods have been held for another purpose other than sale or exchange. The other purpose is that of being for the purpose of leasing.

As the second-hand goods have been held for another purpose and have been used for that purpose, then the exclusion will apply.

Policy intent of section 18 of the GST Transition Act

Section 18 of the GST Transition Act extends the input tax credit provided by section 66-5 of the GST Act to second-hand goods acquired prior to 1 July 2000 and held as inventory on that day (except for inventory held for the purpose of manufacture). Extending this rule to second-hand goods acquired prior to 1 July 2000 provides recognition of the embedded Australian wholesale sales tax borne in respect of those goods.

In your case the acquisition of the second-hand goods occurred outside of Australia. Wholesale sales tax was not borne by you in relation to the second-hand goods.

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