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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012447911106

Ruling

Subject: GST and pawn broking

Questions

1. If a client, who is registered for GST and carries on an enterprise, obtains a short term loan from you on the security of a vehicle belonging to the enterprise and defaults on the loan agreement, are you entitled to claim input tax credits on the acquisition of the vehicle belonging to the client?

2. If a client obtains a short term loan from you on the security of a vehicle belonging to the client for private purposes and defaults on the loan agreement, are you entitled to claim an input tax credit on the acquisition of the vehicle belonging to the client?

Decisions

1. Yes, if the ownership of the vehicle passes to you, you are entitled to claim an input tax credit on the acquisition of the vehicle under section 11-5 of the A New tax System (Goods and Services Tax) Act 1999 (GST Act).

2. Yes, if the ownership of the vehicle passes to you, you are entitled to claim an input tax credit on the acquisition of the vehicle under Subdivision 66-A of the GST Act.

Relevant facts and circumstances

You carry on an enterprise of pawn broking. You are registered for GST.

When a client is in financial distress, the client comes to you and borrows money on a short term basis after entering into a loan agreement. Usually the repayment period is two to three months.

As security for the loan, you keep a vehicle belonging to your client in your holding yard. The vehicle could be a used car, truck, van or even a motor bike.

Before the expiry of the loan term, the client has to pay back the loan plus accrued interest. If this does not happen, the client forfeits the vehicle and the ownership of the vehicle automatically passes to you.

You sell the forfeited vehicle to the public in order to recover the outstanding loan balance. When you sell the forfeited vehicle to the public, you charge GST on the sale.

Some of your clients carry on an enterprise and are registered for GST. They obtain a loan on the security of a vehicle belonging to their enterprise for the purposes of the enterprise.

Some of your client are not registered for GST and do not carry on an enterprise. They obtain a loan on the security of a vehicle belonging to them for private purposes.

Relevant legislative provisions

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-5

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 11-5

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 11-15

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 66-5

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 66-10

A New tax System (Goods and Services Tax) Act 1999 (GST Act) - section 195-1

A New Tax System (Goods and Services Tax) Regulations 1999 - sub regulation 40-5.09(3)

Reasons for the decisions

Decision 1

Under Item 2 of subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations), the supply of an interest in a credit arrangement (loan) by you to a client is a financial supply. The corresponding debt payable by the client is the consideration for this supply.

The supply of a loan for which a security is required is a financial supply. A financial supply is an input taxed supply and GST is not payable on the transaction.

The second-hand vehicle is provided by the client to you only as a security for the loan. You do not acquire the vehicle at this stage.

Taxable supply

Section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states:

You make a taxable supply if:

    (a) you make the supply for *consideration; and

    (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

    (c) the supply is *connected with Australia; and

    (d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST free or *input taxed.

* Denotes a term defined in section 195-1 of the GST Act.

If the client defaults on the loan agreement (agreement), as per the terms of the agreement, the ownership of the vehicle automatically passes to you.

Subsection 9-10(1) of the GST Act provides that a supply is any form of supply whatsoever. We consider that in this situation, the client supplies the vehicle to you through forfeiture. Your consideration for this supply is the cancellation of the outstanding debt owed by the client under the agreement.

If your client carries on an enterprise and is registered or required to be registered for GST and provides a vehicle belonging to the enterprise as security, in case of a forfeiture of the vehicle, the client will supply the vehicle to you for consideration. Therefore, paragraph 9-5(a) of the GST Act will be satisfied.

As the loan was taken in the course or furtherance of the enterprise and on the security of a vehicle belonging to the enterprise, paragraph 9-5(b) of the GST Act will be satisfied.

The supply is connected with Australia and the client is registered or required to be registered. Therefore, paragraphs 9-5(c) and (d) will be satisfied.

The supply of a second-hand vehicle is not a GST-free or input taxed supply under any provision of the GST Act. Therefore, in this situation, the client will make a taxable supply of a second-hand vehicle to you.

Creditable acquisition

Section 11-5 of the GST Act states that you make a creditable acquisition if:

    (a) you acquire anything solely or partly for a *creditable purpose; and

    (b) the supply of the thing to you is a *taxable supply; and

    (c) you provide or are liable to provide *consideration for the supply; and

    (d) you are *registered or *required to be registered.

Section 11-15 of the GST Act refers to creditable purpose and states:

    1. You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your enterprise.

    2. However, you do not acquire the thing for a creditable purpose to the extent that:

      (a) the acquisition relates to making supplies that would be input taxed; or

      (b) the acquisition is of a private or domestic nature.

    3. …..

When the client defaulted on the loan, the client supplied the vehicle to you through forfeiture. You acquired the vehicle for the purpose of selling it to the public as a taxable supply. Accordingly, your acquisition of the forfeited vehicle will be for a creditable purpose and paragraph 11-5(a) of the GST Act will be satisfied.

As mentioned above, the supply of the vehicle by the client to you will be a taxable supply and paragraph 11-5(b) of the GST Act will be satisfied.

As mentioned above, your consideration for this supply will be the cancellation of the outstanding debt of the client and paragraph 11-5(c) of the GST Act will be satisfied. As you are registered for GST, paragraph 11-5(d) of the GST Act will be satisfied.

Accordingly, you will be entitled to claim an input tax credit equal to 1/11th of the consideration provided. In this case, the consideration provided is the outstanding debt owed under the contract.

If the consideration is in excess of $75, you need a tax invoice from the client in order to claim the relevant input tax credit.

Decision 2

Where the client is not registered for GST and has not forfeited the vehicle in the course or furtherance of an enterprise, the supply of the second-hand vehicle to you would not be a taxable supply. Therefore, you will not make a creditable acquisition under section 11-5 of the GST Act.

However, Division 66 of the GST Act allows you, in some circumstances, to claim an input tax credit for an acquisition of second-hand goods even though the supply to you was not a taxable supply.

Section 66-5 of the GST Act outlines when an entity will make a creditable acquisition of second-hand goods. Section 66-5 of the GST Act states:

    (1) If you acquire *second-hand goods for the purposes of sale or exchange (but not for manufacture) in the ordinary course of *business, the fact that the supply of the goods to you is not a *taxable supply does not stop the acquisition being a *creditable acquisition.

    (2) However, this section does not apply and is taken never to have applied to the acquisition if:

      (a) the supply of the goods to you was a *taxable supply or was *GST-free; or

      (b) you *imported the goods; or

      (c) the supply of the goods to you was a supply by way of hire; or

      (d) Subdivision 66-B applies to the acquisition; or

      (e) you make a supply of the goods that is not a taxable supply.

    (3) This section has effect despite section 11-5 (which is about what is a creditable acquisition).

Section 66-10 of the GST Act states:

    (1) The amount of the input tax credit for a *creditable acquisition of *second-hand goods for which the consideration is more than $300 is:

      (a) an amount equal to 1/11 of the *consideration that you provide or liable to provide for the acquisition; or

      (b) if that amount is more than the amount of the GST payable on a *taxable supply of the goods that you make - the amount of GST on that taxable supply.

    (1A) The amount of the input tax credit for a *creditable acquisition of *second-hand goods for which the *consideration is $300 or less is amount equal to 1/11 of the *consideration that you provide or are liable to provide for the acquisition.

    (2) However, this section does not apply if the supply of the goods to you is a *taxable supply.

    (3) This section has effect despite section 11-25 (which is about the amount of input tax credits for creditable acquisitions)

As per the given facts, the vehicles kept as security for the short term loans are second-hand vehicles.

Once you acquire a second-hand vehicle belonging to a client through forfeiture, you sell it to the public. Therefore, you acquire a second-hand vehicle belonging to your client for the purposes of sale or exchange in the ordinary course of your business or enterprise.

As the client is not registered for GST and does not provide the vehicle as a part of an enterprise carried on by the client, the supply of the vehicle to you will not be a taxable or GST-free supply and paragraph 66-5(2)(a) of the GST Act will not apply.

Paragraphs 66-5(2) (b), (c) and (d) of the GST Act do not apply to this situation.

As your subsequent sale of the vehicle will be a taxable supply made in the course of your enterprise, paragraph 66-5(2)(e) of the GST Act will not apply.

Accordingly, under section 66-5 of the GST Act, acquisition of a vehicle from such a client through forfeiture will be a creditable acquisition.

Input tax credits

Under paragraph 66-10(1)(a) of the GST Act, if the consideration for the acquisition of the vehicle is more than $300, you will be entitled to an input tax credit of 1/11th of the consideration.

However, under paragraph 66-10(1)(b) of the GST Act, if the above input tax credit is greater than the GST payable by you on the subsequent sale of the vehicle to the public, your entitlement to an input tax credit will be restricted to the amount of GST payable by you on your subsequent taxable supply of the vehicle.


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