Edited version of private ruling

Authorisation Number: 1011756856046

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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 (You) has been registered for GST from a date after 1 July 2000.

· You have been a member of a GST group of which the group representative is Entity B.

· You advise that in the course of carrying on your enterprise of the leasing and sale of second-hand goods you acquired three 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 each of the second-hand goods is as follows:

Second hand good 1 (Good 1)

· Good 1 was originally acquired by you from Entity C some years before 1 July 2000.

· After this date but prior to 1 July 2000 you entered into a financing agreement in respect of the Good 1. Good 1 was sold to Entity D who onward sold it to Entity E.

· Entity E then leased Good 1 to you.

· You advise that the lease was effected with an option to purchase Good 1 at the end of the lease term, and as such was a hire purchase agreement. No GST was charged to you on the purchase as the transaction took place prior to the introduction of GST.

· You onward leased Good 1 to a number of lessees after this date. Prior to 1 July 2000 you leased Good 1 to Entity F which sub-leased it to Entity G. Entity G acted as the importer of the good into Australia prior to 1 July 2000.

· Under the terms of the Hire Purchase/lease agreement, the title in Good 1 transferred from Entity E to you after 1 July 2000. At the time of the transfer to you Good 1 was in Australia. Neither you nor Entity E accounted for the GST on the supply on the basis that the relevant supply and acquisition occurred prior to 1 July 2000 for GST purchases in respect of hire purchase arrangements.

· You onward sold Good 1 to Entity H after this date, while it was in Australia. Entity H accounted for the GST on the sale of Good 1 via the reverse charge provision under Division 83 of the GST Act.

· Entity H then sold Good 1 to Entity G as a taxable supply with that supply being reported under Division 83 of the GST Act by Entity G.

Second-hand good 2 (Good 2)

· Entity I acquired Good 2 from Entity C prior to 1 July 2000.

· On the same date, you entered into an agreement with Entity I to lease Good 2. You advise that the lease to you was effected with an option to purchase Good 2 at the end of the lease term and as such was a hire purchase agreement. At the time of the acquisition by you the good was second hand as it had previously been owned and used. No GST was charged to you as the transaction took place prior to the introduction of GST.

· You onward leased Good 2 to a number of lessees prior to 1 July 2000. After this but before 1 July 2000 you leased Good 2 to Entity F who sub-leased it to Entity G.

· You advise that entity G acted as the importer of Good 2 into Australia prior to 1 July 2000.

· Under the terms of the Hire/Purchase/lease agreement, the title in Good 2 transferred from Entity I to you on after 1 July 2000. Good 2 was located in Australia at the time of the transfer of the title. Neither you nor Entity I 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 the hire purchase arrangement.

· You onward sold the good to Entity H after this date while the good was in Australia. They accounted for GST on the sale via a Division 83 reverse charge.

· Entity H then sold Good 2 to Entity G as a taxable supply with GST being reported under Division 83 of the GST Act.

Second-hand good 3 (Good 3)

· Good 3 was used by Entity J for a period of years prior to 1 July 2000. You acquired Good 3 from Entity J prior to 1 July 2000.

· You onward leased the Good 3 to Entity L. You then leased Good 3 to Entity F who sub-leased Good 3 to Entity G from prior to 1 July 2000 to after 1 July 2000.

· You advise that Entity G acted as the importer on Good 3's importation into Australia prior to 1 July 2000.

· You subsequently sold Good 3 to Entity H after 1 July 2000 while it was in Australia. GST was accounted for by Entity H under the reverse charge provisions under Division 83 of the GST Act.

· Entity H then onward sold the good to Entity G as a taxable supply with GST being reported under the Division 83 of the GST Act reverse charge provisions.

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

· For Goods F and J you have provided a copy of the relevant lease agreement between Entity D and yourself which outlines the arrangement under which the goods were provided to you.

Good 1 Lease Agreement

A section of the Lease Agreement provides for semi-annual payments over a number of years.

Another section refers to amounts payable which includes the lessor's costs and a variable amount.

A further section provides that you will have the option to purchase Good 1 and that title in Good 1 will then be transferred to you.

Good 2

The Lease Agreement and in particular the Lease Supplement between you and Entity I is for a number of years starting before 1 July 2000 and ending after 1 July 2000 with payment to be made on a semi-annual basis.

A section of the Lease Agreement is about acquisition and sale and provides for a purchase option.

The schedules to the Lease Agreement outline the rent per period and the termination sums respectively. The sterling termination sum in combination with either the A-Line, B-Line and C-Line termination sums (expressed in another currency) is in excess of the initial purchase price.

This is reflected in the various amounts payable throughout the Lease Agreement

Another section provides that Good 2 shall remain vested in Entity I throughout the lease period.

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

Summary

In the present case Goods F and J were acquired under the relevant hire purchase agreements by you prior to 1 July 2000. You acquired Good 3 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 them 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 the goods 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 Goods 1 and 2 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.

Good 3 was acquired by you prior to 1 July 2000.

Lease or hire purchase - Goods F and J

'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 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 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.

(i) 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

(ii) 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 both goods will be considered to have been acquired by you prior to 1 July 2000.

Good 1

In this case, the arrangement involves a Lease Agreement over the good. The Lease Agreement provides that you as Lessee can use the good 1 for a particular term for consideration in the form of semi-annual payments.

However, a section of the Lease Agreement 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 Agreement for Good 1 the charge for the hire exceeds that the price of the good.

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

A further section in the Lease Agreement provides that title to and ownership of Good 1 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 of the relevant requirements, the Lease Agreement is a 'hire purchase agreement' rather than a lease for GST purposes.

As such for GST purposes Good 1 was acquired by you prior to 1 July 2000.

Good 2

In this case, the arrangement involves a Lease Agreement over Good 2. The Lease Agreement provides that you as Lessee can use Good 2 for a particular term for consideration in the form of semi-annual payments. As such, the Lease Agreement superficially appears to be a lease.

However, a section of the Lease Agreement 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.

The Schedules to the Lease Agreement outline the rent per period and the termination sums respectively. The sterling termination sum in combination with either the A-Line, B-Line and C-Line termination sums (expressed in another currency) is in excess of the initial purchase price.

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

Another section provides that Good 2 shall remain vested in Entity I throughout the lease period. This section satisfies subparagraph 995-1(a)(iii) as title to the good does not pass until the expiry of the lease term.

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

As such for GST purposes Good 2 was 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 Goods 1, 2 and 3 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 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 goods have been held for another purpose and have been used for that purpose, then the exclusion will apply.

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