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Edited version of your written advice
Authorisation Number: 1013131308045
Date of advice: 20 December 2016
Ruling
Subject: GST and attribution
Question 1
Are you entitled to claim an input tax credit in the quarterly tax period in which you first made payment to the finance company for the equipment?
Answer
Yes
This ruling applies for the following periods:
2015, 2016 and 2017
Relevant facts and circumstances
You are a sole trader operating a business.
You are registered for GST, reporting quarterly and accounting for GST on a cash basis.
In the course of your business, you sought to procure the use of equipment.
A retailer was selling the equipment for a certain amount.
You paid a non-refundable deposit to the retailer.
The finance company then purchased the equipment for a reduced price. A tax invoice was raised by the retailer to the finance company for the purchase of the equipment.
You entered into an agreement with the finance company, the terms of which determined, among other things:
● ownership of the equipment
● weekly rent
● minimum term, and
● the rights and responsibilities of both parties.
The executed agreement issued to you provides that:
● there is a facility limit
● you pay an upfront amount comprised of:
● security bond, exclusive of GST
● initial weekly payment
● documentation fee
● you will pay a weekly sum via direct debit
● all costs listed, except for the security bond, are inclusive of GST
● the equipment will remain the property of the finance company though you may make an offer to purchase the equipment at any point in time, at the agreed purchase price
● the agreed purchase price at the end of year 1 is in the agreement
● ownership of the equipment will only pass upon receipt of the agreed purchase price
● the minimum term is a number of months, and
● if you return the equipment, or the equipment is repossessed, before the minimum term has expired, you will still be liable for rent up until the end of the term.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 section 29-10
A New Tax System (Goods and Services Tax) Act 1999 section 158-5
A New Tax System (Goods and Services Tax) Act 1999 section 195-1
Income Tax Assessment Act 1997 section 995-1
Reasons for decision
Summary:
Your contract with the finance company is a hire-purchase agreement.
You are entitled to claim an input tax credit in the quarterly tax period when either: you first made payment to the finance company for the equipment, or if before making your first payment, a tax invoice was issued to you.
Detailed reasoning
Your Agreement
Under section 195-1 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), 'hire purchase agreement' has the meaning given by section 995-1 of the Income Tax Assessment Act 1997:
"hire purchase agreement " 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
(ii) the charge that is or may be made for the hire, together with any 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
(b) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid.
Turning to your circumstances:
● You paid a non-refundable deposit to the retailer.
● The finance company then purchased the equipment at a reduced price and was issued a tax invoice by the retailer for that purchase.
● Your contract with the finance company is a contract for the hire of the equipment.
● Under the contract, you have the right to buy the goods.
● Based on the information in the agreement, the charges payable under the agreement exceed the price of the goods.
● Title in the goods passes to you on receipt of the agreed purchase price and any applicable rent.
On the basis of the above, your contract with the finance company is a hire-purchase agreement for the purposes of the GST Act.
Attribution
Section 29-10 of the GST Act provides the basic rules that are used to determine which tax period an input tax credit for a creditable acquisition is attributable to.
Subsection 29-10(1) provides that you can attribute input tax credits to the tax period in which you provide any of the consideration for the acquisition.
However, subsection 29-10(2) provides that if you account for GST on a cash basis, then you can only attribute input tax credits to a tax period to the extent that the consideration was provided by you in that tax period, including in full or not at all.
Therefore, as you account for GST on a cash basis, under the basic rules, you can only attribute input tax credits to a tax period to the extent that the consideration was provided by you in that tax period.
Division 158 of the GST Act modifies the above basic attribution rules with regards to hire purchase agreements. Specifically, section 158-5 provides that if you account on a cash basis, then the GST Act applies as if you do not account on a cash basis, insofar as it relates to an acquisition you make under a hire purchase agreement.
As your agreement with the finance company in respect of the equipment is a hire purchase agreement, the GST Act applies to the acquisition as if you do not account on a cash basis.
This means that subsection 29-10(2) of the GST Act does not apply to your acquisition of the equipment, and subsection 29-10(1) prevails, entitling you to attribute the input tax credits to the period in which you provided any of the consideration for the acquisition. However, note that under subsection 29-10(3) no input tax credit is attributable unless the entity holds a valid tax invoice at the time that it submits a GST return for that period.
Therefore, you are entitled to claim an input tax credit in the quarterly tax period when either: you first made payment to the finance company for the equipment, or if before making your first payment, a tax invoice was issued to you.
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