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Ruling

Subject: GST and hire purchase agreements

Question 1:

Is Entity A (as the supplier) entitled to make a decreasing adjustment under Division 19 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to terminated hire purchase agreements?

Answer:

Yes, Entity A (as the supplier) is entitled to make a decreasing adjustment under Division 19 of the GST Act in relation to terminated hire purchase agreements.

Question 2:

Is the methodology adopted by Entity A appropriate to calculate the relevant decreasing adjustment for terminated instalment amounts in relation to terminated agreements?

Answer:

Yes, the methodology adopted by Entity A s appropriate to calculate the relevant decreasing adjustment for terminated instalment amounts in relation to terminated agreements where Entity A calculates the actual date of termination of the hire purchase agreements appropriately.

Question 3:

Can the methodology used to calculate the decreasing adjustment for terminated instalment amounts in relation to terminated hire purchase agreements be applied to amounts that are written off as bad debts?

Answer:

Yes, the methodology used to calculate the decreasing adjustment for terminated instalment amounts in relation to terminated hire purchase agreements can be applied to amounts that are written off as bad debts provided Entity A does not recover any of the amounts in arrears.

Question 4:

If yes, should the methodology be applied from the date the hire purchase agreement went into arrears, to the final future instalment date?

Answer:

To the extent the hire purchase agreement termination date coincides with the bad debt write-off date, adjustments under Division 19 and Division 21 of the GST Act will be attributable in the same tax period. Accordingly, where the hire purchase agreement termination date does not coincide with the bad debt write-off date;

Question 5:

Can the decreasing adjustments under Division 19 and Division 21 of the GST Act be attributed to the same tax period where the point of attribution is within the 4 year BAS amendment period?

Alternatively,

Where either the point at which the hire purchase agreement was terminated or the date at which the amounts in arrears were written off fall outside the 4 year BAS adjustment period, should only the amount still within the 4 year BAS adjustment period be attributed to the relevant tax period?

Answer:

the decreasing adjustment under Division 19 should be attributable to the tax period in which SGAB becomes aware of those adjustments; and

the decreasing adjustment under Division 21 should be attributed to the tax period when the bad debt adjustment is written off.

Where, either the point at which the hire purchase agreement was terminated or the date at which the amounts in arrears were written off fall outside the 4 year BAS adjustment period, only the amount still within the 4 year BAS adjustment period should be attributed to the relevant tax period.

Relevant facts and circumstances

Entity A is a corporate and investment finance provider and is licensed as an Australian Deposit Taking Institution (ADI).

Entity A is registered for GST and accounts for GST on a non-cash basis.

Entity A enters into a number of hire purchase agreements (with disclosed credit terms) with a range of clients.

Legal title to the hired goods remains with Entity A until the hire purchase agreements are paid in full.

For GST purposes, Entity A has historically remitted the full amount of GST in relation to the capital component of the hire purchase agreement at the earlier of the point at which consideration is received or when Entity A issues the recipient with a tax invoice.

For hire purchase agreements entered into before 1 July 2012, Entity A did not charge GST on the financing component of the hire purchase agreement.

The hire purchase agreements covered in this ruling are those that are entered into before 1 July 2012.

The hire purchase agreements covered in this ruling are those that did not have balloon payments in the final instalment.

Under various circumstances (e.g. default, liquidation, receivership, etc) a number of these hirers have defaulted on payments in relation to the hire purchase agreements.

When a hirer defaults under the hire purchase agreements, Entity A has the right to terminate the agreement and is entitled to repossess the asset and sell or re-hire the goods.

At the time of termination, the hirer will not have paid instalments that had already become due and payable (amounts in arrears).

After terminating the hire purchase agreement, future instalments are no longer due and payable.

Currently Entity A does not have a system to determine the date of termination of the hire purchase contracts. Entity A uses the day that it decides to 'write off' the contract as the termination date.

Where final termination notices are not issued (for example when a client cannot be located) the write off is also considered to be the date of termination. Where final termination notices are issued (for example, where clients can be located) the actual writing off of the uncollectable amount occurs a few weeks after the actual termination date.

Entity A has taken measures to determine how much consideration relating to each supply under the terminated hire purchase agreements has been paid, including determining the proportion of principal and credit components that have been paid.

Based on the principal and credit proportions, SGAB has calculated the associated GST amounts that should be refundable to them by way of decreasing adjustment in a formula provided to the ATO:

· The formula does not cover situations when the property that is hire purchased is sold or vehicles that are subject to the luxury car tax (LCT).

· Stamp duty payable on the purchase price of the asset financed is included in the Purchase price.

· Brokerage is a reimbursement that is charged to the customer and claimed by SGAB through the hire purchase instalments.

Relevant legislative provisions

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

Division 19

Division 21

Division 29

Taxation Administration Act 1953

Section 105-50

Reasons for decision

Is Entity A (as the supplier) entitled to make a decreasing adjustment under Division 19 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in relation to terminated hire purchase agreements?

Section 19-40 of the GST Act states:

You have an adjustment for a supply for which you are liable to pay GST (or would be liable to pay GST if it were a *taxable supply) if:

· in relation to the supply, one or more *adjustment events occur during a tax period; and

· GST on the supply was attributable to an earlier tax period (or, if the supply was not a taxable supply, would have been attributable to an earlier tax period had the supply been a taxable supply); and

· as a result of those adjustment events, the *previously attributed GST amount for the supply (if any) no longer correctly reflects the amount of GST (if any) on the supply (the corrected GST amount), taking into account any change of circumstances that has given rise to an adjustment for the supply under this Subdivision or Division 21 or 134.

· (terms marked with asterisks (*) are defined in section 195-1 of the GST Act)An adjustment event is defined in subsection 19-10(1) of the GST Act as follows:

An adjustment event is any event which has the effect of:

· cancelling a supply or acquisition; or

· changing the *consideration for a supply or acquisition; or

· causing a supply or acquisition to become, or stop being, a *taxable supply or *creditable acquisition.

Example:

If goods that are supplied for export are not exported within the time provided in section 38-185, the supply is likely to become a taxable supply after originally being a supply that was GST-free.

According to section 19-55 of the GST Act, a decreasing adjustment is defined as follows:

· If the *corrected GST amount is less than the *previously attributed GST amount, you have a decreasing adjustment equal to the difference between the previously attributed GST amount and the corrected GST amount.

· The issue to be determined here is whether the termination of a hire purchase agreement gives rise to an adjustment event and consequently a decreasing adjustment.

According to ATO Interpretative Decision 2006/2 Goods and Services Tax and decreasing adjustments when a hire purchase agreement is terminated due to default (ATO ID 2006/2) where a supplier of a hire purchase agreement exercises it's right to terminate the hire purchase agreement due to a default and the outstanding instalments are no longer payable, it gives rise to a decreasing adjustment to the supplier.

The view expressed in ATO ID 2006/2 is that where a hire purchase contract has been terminated, the consideration for the supply of goods has been reduced as the future instalments are no longer consideration for the supply of goods.

Accordingly, Entity A as the supplier has a decreasing adjustment under section 19-40 of the GST Act when it exercises its right to terminate the hire purchase agreement due to default.

ATO ID 2006/2 depicts the events that occur in a hire purchase agreement that is terminated by using a diagram. (Refer to the ATO ID for diagram).

The decreasing adjustment should be worked out for the period marked as Event (3) in the diagram (Event 3).

Is the methodology adopted by SGAB appropriate to calculate the relevant decreasing adjustment for terminated instalment amounts in relation to terminated agreements?

As defined in section 195-1, a decreasing adjustment is the difference between the previously attributed GST amount and the corrected GST amount.

The previously attributed GST amount is defined in section 19-45 of the GST Act as follows:

The previously attributed GST amount for a supply is:

· the amount of any GST that was attributable to a tax period in respect of the supply; plus

· the sum of any *increasing adjustments, under this Subdivision or Division 21, that were previously attributable to a tax period in respect of the supply; minus

· the sum of any *decreasing adjustments, under this Subdivision or Division 21 or 134, that were previously attributable to a tax period in respect of the supply.

The corrected GST amount is mentioned in paragraph 19-40(c) of the GST Act and refers to the correct amount that needs to be attributed by the supplier of a thing after taking into account the adjustment.

Being a non-cash client, Entity A would have remitted the GST for the taxable component for the full term of the contract.

Therefore, the decreasing adjustment to be calculated should be equal to the amount of GST attributable to Event (3). The hire purchase agreements that are covered in this ruling are mixed supplies (being a taxable supply of goods and an interest component that is an input taxed financial supply). Thus, the proposed formula should reflect that GST is not payable on the interest component.

If the proposed formula by Entity A correctly reflects the difference between the previously attributed amount and the corrected GST amount of the period Event (3), then it will be appropriate to use it for the purpose of calculating the relevant decreasing adjustment amount.

In the proposed formula the decreasing adjustment is referred to as the balance of GST which is calculated in a formula provided to the ATO.

Can the methodology used to calculate the decreasing adjustment for terminated instalment amounts in relation to terminated hire purchase agreements be applied to amounts that are written off as bad debts?

If yes, should the methodology be applied from the date the hire purchase agreement went into arrears, to the final future instalment date?

As the taxable and input taxed components of the amounts in arrears which have been written off as bad debts have been calculated on the same basis as those amounts previously received as the future instalment amounts, it is appropriate to use the same formula to calculate the bad debt adjustment.

We accept your proposed methodology to calculate the bad debt adjustment which first calculates an amount the same way as the decreasing adjustment outlined above in question 2 for the period referred to as Event (2) and Event (2) plus Event (3). The GST amount attributable to the period Event (2) is then determined by subtracting the amount calculated for the period Event (2) from the period Event (2) plus Event (3). This is the bad debt adjustment attributable to Event (2).

Note: Event (2) plus Event (3) is the period between when the hire purchase went into arrears to the final future instalment date.

Can the decreasing adjustments under Division 19 and Division 21 of the GST Act be attributed to the same tax period where the point of attribution is within the 4 year BAS amendment period?

Where either the point at which the hire purchase agreement was terminated or the date at which the amounts in arrears were written off fall outside the 4 year BAS adjustment period, should only the amount still within the 4 year BAS adjustment period be attributed to the relevant tax period?

Subsection 29-20(1) of the GST Act states;

An *adjustment that you have is attributable to the tax period in which you become aware of the adjustment.

Tax period is defined in section 195-1 of the GST Act as follows:

· tax period means a tax period applying to you under Division 27 or section 48-73, 57-35, 58-35 or 151-40.

According to the definition of a tax period, a BAS adjustment period is not a tax period. Therefore, the tax period that applies to Entity A would be the tax periods that are applicable to them.

Subsections 105-50(1) and 105-50(2) of the Taxation Administration Act 1953 state:

Any unpaid *net amount, *net fuel amount or amount of *indirect tax (together with any relevant *general interest charge under this Act) ceases to be payable 4 years after it became payable by you.

If:

· an amount was paid to you, or applied under Division 3 of Part IIB of this Act, as:

· a refund in relation to a *net amount, *net fuel amount or amount of *indirect tax; or

· an amount of indirect tax that was overpaid or wrongly paid; and

· that amount exceeded the amount (if any) that you were entitled to be paid, or to have applied under Division 3 of Part IIB of this Act;

· the amount of the excess (together with any relevant *general interest charge under this Act) ceases to be payable 4 years after it became payable by you.

(3) However, subsection (1) does not apply to an amount, and subsection (2) does not apply to an amount of an excess, if:

· within those 4 years the Commissioner has required payment of the amount or the amount of excess by giving a notice to you; or

· the Commissioner is satisfied that:

· the payment of the amount was avoided by fraud or evaded; or

· the payment of the amount of excess, or its application under Division 3 of Part IIB of this Act, was brought about by fraud or evasion.

Therefore, where the date of write off coincides with the date of termination, the adjustments under Division 19 and Division 21 of the GST Act will be attributable to the same tax period.

However, where a final termination notice is issued to a client and the outstanding amounts are subsequently written off, the decreasing adjustment under Division 19 (i.e. in relation to the termination of the hire purchase agreement) will be attributed to the period in which entity A became aware of the adjustment. Additionally, the decreasing adjustment under Division 21 (i.e. in relation to the written-off bad debt amount) will be attributable to the period in which entity A became aware of the adjustment.

Therefore, if the decision to write off the bad debt and to terminate the hire purchase agreements were made in different tax periods, then the relevant adjustments need to be attributed to the corresponding tax periods.

Accordingly, where the point at which the hire purchase agreement was terminated or the date at which the amounts in arrears were written off fall outside the 4 year BAS adjustment period, only the amount still within the 4 year BAS adjustment period may be attribute to that relevant tax period.