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Ruling

Subject: GST and entitlement to input tax credits - refinance of motor vehicle

Question 1

Are you entitled to claim GST credits where you have entered into a hire purchase arrangement to re-finance cars?

Answer

Yes. However, you have also made a taxable supply of the cars to the finance company of the same amount such that the transactions balance each other out.

Relevant facts and circumstances

You purchased motor vehicles under a chattel mortgage (from the first financier) and claimed the GST on this transaction as an input tax credit in your business activity statement (BAS).

You have recently 'refinanced' these vehicles by entering into a commercial hire purchase agreement with a different financier (the new financier).

This financier has provided you with tax invoices in relation to the supply of the vehicles.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Division 9

Division 11

Reasons for decision

Summary

You are entitled to claim input tax credits as a result of 'refinancing' your motor vehicles under hire purchase arrangements. However you are also liable for the GST on the taxable supply of the motor vehicles to the new finance company.

Detailed reasoning

When you initially purchased the motor vehicles they were financed under a chattel mortgage.

Under a chattel mortgage vehicle ownership is transferred to you at the commencement of your finance contract. The loan agreement entered into grants to the lender a right to retain the property or goods in your possession until payment of the debt amount.

ATOID 2001/727 considers entitlement to input tax credits for an acquisition under an asset loan agreement. Where a business operator acquires an asset under an asset loan agreement they are entitled to an input tax credit under section 11-20 of the GST Act. Under an asset loan agreement you obtain the funds from the finance company, and then use these funds to purchase the asset from the supplier. As such, it is you that is providing the consideration for the supply of the asset (and not the finance company).

Where the asset is acquired for business purposes and does not relate to making input taxed supplies, the asset has been acquired for a creditable purpose. On this basis you therefore claimed the input tax credits in your business activity statement.

You have subsequently terminated this arrangement and entered into new agreements with a different financier. The documentation you have provided indicates that you have entered into a commercial hire purchase arrangement.

Under a hire purchase agreement you purchase goods through instalment payments, and use the goods while paying for them. However, most importantly, you do not own the goods until you have paid the final 'purchase payment' at the end of the term. Under this arrangement the financier has therefore purchased the second-hand goods (cars) from you. However, they have provided the funds directly to your first financier on your behalf in satisfaction of your liability to the first financier under the earlier chattel mortgage.

You have therefore made a supply of second-hand vehicles to the new financier. As you are registered for GST, the supply is a supply of business assets made in the course of your enterprise, the supply is connected with Australia and the supply is for consideration it is therefore a taxable supply and you are liable for GST on this supply. This needs to be accounted for in your business activity statement in the period when the transaction took place.

At or around the same time, the new financier has made a corresponding supply to you of the cars under the hire purchase arrangement.

The supply of goods to you under the hire purchase arrangement is also a taxable supply, and the price you pay includes GST. As you use the goods in your business you are able to claim a GST credit. Where you account for GST on an accruals basis you can claim the full GST credit on your hire purchase agreement in the tax period in which you received the tax invoice or you make your first payment (whichever is earlier).