Edited version of private ruling

Authorisation Number: 1011476839723

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Ruling

Subject: GST and financial supply

Question 1

Is your supply of the hire purchase rights to the purchaser, in accordance with the sale agreement, an input taxed financial supply?

Answer

Yes, your supply of the hire purchase rights to the purchaser, in accordance with the sale agreement, is an input taxed financial supply.

Question 2

Are you or the purchaser responsible for adjustments under Divisions 19 or 21 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect to hire purchase agreements terminated due to default after assignment of the receivables?

Answer

You are the entity responsible for adjustment under Divisions 19 or 21 of the GST Act in respect to hire purchase agreements terminated due to default after assignment of the receivables.

Relevant facts and circumstances

Your ruling is based on the following facts.

Until recently, you had conducted a financing business in Australia (Business). Following a decision to cease originating new finance business in Australia, you agreed recently to sell your right, title and interest to certain Assets relating to the Business to the purchaser under the Sale Agreement.

The Assets included your commercial hire purchase portfolio, comprising your right, title and interest in Receivables (being the outstanding amounts owing to you by Obligors under the relevant Hire Purchase Agreements) and related rights under the Hire Purchase Agreements (HP Rights).

The parties completed the sale on the basis that the supply of the HP Rights constituted an input taxed financial supply for the purposes of Subdivision 40-A of the GST Act.

Under clause 5.6(c) of the Sale Agreement, you and the purchaser agreed that you would make this application to confirm the above treatment. This private ruling is sought to achieve certainty of the treatment adopted by the parties on completion of the Sale Agreement.

Prior to the decision to cease originating new finance business in Australia, you conducted a comprehensive finance business, including offering and entering into a range of finance facilities with customers, such as loans, leases and commercial hire purchase agreements. This application relates only to the commercial hire purchase aspects of your Business under the Sale Agreement.

You believe that the commercial hire purchase agreements between you and your customers reflect the Australian Taxation Office conventional understanding of hire purchase under which a customer finances the acquisition of goods through instalment payments and has possession and use of the goods while paying for them until taking ownership on payment of the final instalment.

You disclosed the credit component of the charges in the Hire Purchase Agreements (HPA) with customers and, in respect of the credit charges, made a financial supply and, in respect of the goods the subject of the agreement, a taxable supply. The sale price for the goods constituted consideration for a taxable supply. You accounted for GST on the taxable supply of the goods in the period of entry into the HPA in accordance with the Commissioner's views in GSTR 2000/29, on the basis that the basic attribution rules should apply to the supply of goods under a HPA in the same way as for the supply of goods by way of sale.

Prior to the sale of the HP Rights to the purchaser, you had entered into securitisation arrangements with respect to a significant number of its HPAs. Under these arrangements, you assigned the Receivables relating to HPAs, ultimately to a trustee of a special purpose securitisation trust.

In accordance with the Commissioner's views in GSTR 2004/4, the assignments of the Receivables were treated as input taxed financial supplies, on the basis that they fell within the meaning of item 2 of regulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (Cth) (GST Regulations). Specifically, the assignments constituted the supply of an interest in or under a debt, credit arrangement or right to credit.

The special purpose securitisation trust interest in the Receivables was extinguished prior to completion of the sale to the purchaser under the Sale Agreement (see below), such that you became the absolute owner of the previously assigned right, title and interest in the Receivables.

Consistent with your winding down of business in Australia you and the purchaser executed the Sale Agreement, under which:

(a) you assigned to the purchaser all your right, title and interest in, to and under, the "Assets";

(b) the "Assets" were defined to mean "Securitised Assets" and "Unsecuritised Assets" ;

(c) the "Securitised Assets" and "Unsecuritised Assets" were defined to mean the "Receivable Rights" which were, in turn, defined to mean:

• each "Receivable";

• the "Receivable Amount";

• all "Receivable Securities" and "Receivable Equipment"; and

• various other related rights (e.g. documents and records);

(d) "Receivables" were defined to mean "the outstanding financial accommodation provided to, or at the request of, Obligors consisting of

Hire Purchase Agreements ... in relation to the Assets ... as those rights exist from time to time, and all right, title and interest to receive any payments from an Obligor, and any other rights, under the relevant Receivable Document and Receivable Security";

(e) "Receivable Amount" was defined to mean "the aggregate gross amounts outstanding from the Obligors" as recorded in your systems;

(f) "Receivable Securities" was defined to mean the security interests or guarantees provided by an Obligor or any other person relating to any Receivable or any Receivable Equipment for the purposes of securing such Receivable;

(g) "Receivable Equipment" was defined to mean, relevantly, all assets hired to Obligors;

(h) the amount payable for the assignment of the Assets was the Purchase Price, which was essentially determined as the total amount payable by Obligors under the Receivables less an agreed discount;

(i) after Completion, it was contemplated in the Sale Agreement that the Obligors would be informed of the assignment by you to the purchaser in order to perfect legal title to the Assets;

(j) the parties agreed to complete the transaction in accordance with their understanding that the supply of the Hire Purchase Agreements and Receivable Rights thereto (HP Rights) did not constitute a taxable supply but instead was an input taxed financial supply. The parties agreed to confirm their understanding by making this application.

Reasons for decision

The legislation

1. Under subsection 40-5(1) of the GST Act a financial supply is input taxed. Subsection 40-5(2) of the GST Act provides that a financial supply has the meaning given in the GST Regulations.

Subregulation 40-5.09(1) of the GST Regulations provides that the provision, acquisition, or disposal of an interest mentioned under subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if:

(a) the provision, acquisition or disposal of that interest is:

· for consideration; and

· in the course or furtherance of an enterprise; and

· connected with Australia, and

(b) the supplier is:

· registered or required to be registered for GST, and

· a financial supply provider in relation to the supply of the interest.

Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists an interest in or under a debt, credit arrangement or right to credit, including a letter of credit.

Supplies that are financial supplies

Goods and Services Tax Ruling GSTR 2004/4: assignment of payment streams including under a typical securitisation arrangement (GSTR 2004/4) explains the Commissioner's view on how the GST Act and the GST regulations apply to the supply of rights to a payment stream by means of an assignment.

Paragraphs 10 and 30 of GSTR 2004/4 state the following:

10. Item 2 in subregulation 40-5.09(3) of the GST regulations refers to a debt, credit arrangement or right to credit, including a letter of credit. The examples applicable to item 2 in Schedule 7 include the right to an income stream under a securitisation arrangement.

30. Provided there has been an effective legal or equitable assignment of a right to all or part of a payment stream, or an agreement to assign the right to a payment stream that arises in the future there will be the supply of an interest in or under a debt. This is a financial supply under item 2 of subregulation 40-5.09(3) provided the requirements of subregulation 40-5.09(1) are also satisfied.

Paragraphs 80-82 of GSTR 2004/4 state the following:

Hire purchase agreements

80. For GST purposes supplies under some hire purchase agreements are treated as wholly taxable supplies. The supplies made under other agreements, where there is a separate charge for the credit component that is disclosed to the recipient of the goods, may partly constitute financial supplies. The difference is irrelevant for the purposes of determining the GST consequences of an assignment of the right to the payment stream arising from either type of agreement.

81. A hire purchase agreement gives rise to a presently existing right to receive regular payments from the debtor. In some circumstances receipt of the final payment may be contingent on the option to purchase the goods being exercised. Even though the payment may be subject to a contingency, the right to the payment stream, under an existing hire purchase agreement, is a presently existing right that is property and an interest for the purposes of regulation 40-5.02.

82. Assignment of this property is the disposal of an interest in a debt for GST purposes. The disposal of the interest is a financial supply if the requirements of subregulation 40-5.09(1) are satisfied. Disposal of this interest does not affect the obligation of the assignor to remit GST on the taxable component of a supply by way of a hire purchase agreement.

Receivables

In this case you informed that, prior to the sale of the HP Rights to the purchaser, you had entered into securitisation arrangements with respect to a significant number of your HPAs. Under these arrangements, you assigned the Receivables relating to HPAs, ultimately to a trustee of a special purpose securitisation trust and that the Trusts' interest in the Receivables was extinguished prior to completion of the sale to the purchaser under the Sale Agreement, such that it became the absolute owner of the previously assigned right, title and interest in the Receivables. You then assigned your rights, title and interest to and under the Receivables Rights to the purchaser.

You also informed that this application relates only to the commercial hire purchase aspects of your Business under the Sale Agreement and that the assets included your commercial hire purchase portfolio, comprising your right, title and interest in Receivables (being the outstanding amounts owing to you by Obligors under the relevant HPAs) and related rights under the HP Rights.

Receivables is defined in the Sale Agreement to mean "the outstanding financial accommodation provided to, or at the request of, Obligors consisting of loans, Hire Purchase Agreements and Lease Arrangements in relation to the Assets specified in the Completion document, as those rights exist from time to time, and all right, title and interest to receive any payments from an Obligor, and any other rights, under the relevant Receivable Document and Receivable Security"

Obligors is defined in the Sale Agreement and means in respect of the Receivables, to mean any person obliged to make payment under, or is indebted under, the contract in respect of the receivables, whether under a principal or secondary obligation, and includes where the context requires, any other person obligated to make payments with respect to that receivables (including any guarantor or other provider of a Receivable Security).

Therefore, based on the information provided, it is accepted that the supply of the hire purchase rights from you to the purchaser is an assignment of the right to the payment stream, under existing hire purchase agreements. Such an assignment is a supply of an interest for the purposes of regulation 40-5.02 and therefore an input taxed financial supply.

Assignment of payment stream

2. Paragraphs 34-36 of GSTR 2004/4 relate to the assignment of a payment stream and to the assignment of underlying property. Those paragraphs have been reproduced below.

Assignment of payment stream and assignment of underlying property

34. It is necessary in some cases to distinguish the assignment of underlying property from the assignment of a payment stream arising from the property. For example if the owner of a building that is leased sells the freehold to another person subject to the existing lease, the purchaser will be entitled to the rent from the building as its owner. In an abstract sense it can be said that the former owner has assigned the right to rent but it is not an assignment of the rental stream in the sense that is generally understood in the law when referring to assignments of rights to payment streams (Mason CJ in Booth).

35. When there is a transfer of legal ownership by the owner of the freehold, the new owner will continue to make a supply after the sale. The GST consequences will be determined by reference to the circumstances of the new owner (for example, whether the new owner is registered or required to be registered).

36. If there is no sale of the building but only an assignment of the rental stream, there are two supplies relevant in applying the GST, the rental of the building by its owner, and the dealing in the stream of rental payments which will be a financial supply if the conditions of regulation 40-5.09 are satisfied.

Whether a transaction amounts to an assignment of an underlying property as opposed to an assignment of the right to the payment stream will depend on an analysis of the transaction. This is discussed in paragraph 42-47 of GSTR 2004/4. Particularly relevant are paragraphs 42 and 44:

42. If the original owner of the underlying property continues to have rights to the property or functions to perform, it is likely that the transaction will be characterised as an assignment of the payment stream, rather than a sale of the underlying property….

Liability for GST on the underlying supply

44. Since an assignment of a payment stream does not change the underlying supply, the assignor retains the obligation to make the underlying supply and remit any GST liability in respect of that supply.

In this situation, you informed that only the receivables were assigned to the purchaser. It follows that, although you assigned the relevant payment streams, you remain the supplier of the goods. Therefore, in accordance with GSTR 2004/4, the assignment does not amount to an assignment of underlying property but is rather an assignment of the right to the revenue stream.

Accordingly, you will be the entity entitled to a decreasing adjustment under Divisions 19 or 21 of the GST Act in respect of all HP agreements terminated due to default and that resulted in reduced consideration being payable.