Edited version of your private ruling

Authorisation Number: 1012570805531

Ruling

Subject: GST and hire purchase

Question 1

Will the Commissioner confirm that, subject to section 16-10 of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act), the entity has a decreasing LCT adjustment where it acquires a luxury car for supply under a hire purchase agreement in circumstances where the entity did not quote its ABN when acquiring the car?

Answer

The Commissioner confirms that a decreasing LCT adjustment arises, under section 15-30 of the LCT Act where the entity acquires a luxury car for supply under a hire purchase agreement in circumstances where it did not quote its ABN when acquiring the car.

However, section 16-10 of the LCT Act provides that as the entity is a member of a GST group, it is the representative member that has the adjustment.

Question 2

Will the Commissioner confirm that, subject to section 16-10 of the LCT Act, the entity has a decreasing LCT adjustment where the entity terminates a hire purchase agreement as a result of default by the hirer?

Answer

The Commissioner confirms that a decreasing LCT adjustment arises, under section 15-10 of the LCT Act where the entity terminates a hire purchase agreement as a result of default by the hirer.

However, section 16-10 of the LCT Act provides that as the entity is a member of a GST group, it is the representative member that has the adjustment.

Question 3

Will the Commissioner confirm that the response to question 2 above is not impacted, pursuant to receivables arising under hire purchase agreements, where the receivables were assigned to a special purpose securitisation trust in return for payment received from the trust?

Answer

The Commissioner confirms that, provided the trustee does not exercise its right to take legal ownership under the agreement, the response to question 2 above is not impacted, pursuant to receivables arising under hire purchase agreements, where the receivables were assigned to a special purpose securitisation trust in return for payment received from the trust.

Relevant facts and circumstances

The entity enters into hire purchase agreements with hirers under which the entity supplies the hirer with the right to use, possess and ultimately purchase the vehicle in consideration of payment of regular instalments over the term of the hire purchase agreement.

Legal title in the vehicle remains with the entity until all amounts payable under the hire purchase agreement have been paid and the option to purchase has been exercised.

The hire purchase agreement discloses the amount of the total rental charges separated into principal and other charges (including interest).

Since the purchase of the vehicle and the entry into the hire purchase agreement are back to back transactions, the entity holds the vehicle for a very short period of time. During that time the entity's intention is to supply it to a customer under a hire purchase agreement.

The total amount payable by the hirer to the entity under the hire purchase agreement comprises a principal component (i.e. the amount financed) and a credit component (i.e. the terms charges).

The principal component generally represents the price of the vehicle financed, although on occasion a customer may wish to finance other costs related to the acquisition of the vehicle such as stamp duty, brokerage fees and/or documentation fees.

The credit component represents the interest and associated fees and charges payable by the hirer for the provision of the finance.

The provision of a vehicle to a hirer under a hire purchase agreement is a taxable supply for GST purposes and consistent with paragraphs 200-203 of GSTR 2000/29, the entity remits GST to the ATO equal to 1/11^th of the consideration received for the taxable supply at the commencement of the hire purchase agreement.

Prior to 1 July 2012, this was limited to the principal component of the amounts payable under the hire purchase agreement (as per item 8 in the table of sub-regulation 40-5.09(3) of the Regulations).

From 1 July 2012, all amounts payable under a hire purchase agreement attract GST (as per items 19 and 20 in the table of sub-regulation 40-5.12 of the Regulations which provide that neither the supply of goods nor the supply of credit under a hire purchase agreement is a financial supply).

After an instalment falling due has not been paid, the entity may issue a notice to a hirer requiring the hirer to rectify the default within a further 14 days. If the default is not remedied within this time, the entity will terminate the hire purchase agreement.

At the time of termination the hirer is likely to have amounts in arrears which consist of instalments which had already become due and payable under the hire purchase agreement.

The hire purchase agreement also provides that the hirer is required to indemnify the entity for any losses arising from the termination of the agreement and to pay the entity a termination amount calculated as provided for in the hire purchase agreement.

Following termination of the hire purchase agreement, the entity will write off the instalments in arrears where they are considered to be non-recoverable.

Future rental instalments under the hire purchase agreement will also no longer be due and payable by the hirer. However, the termination amount will be payable.

As part of its funding arrangements, the entity periodically securitises receivables from its business. These receivables include receivables arising from hire purchase agreements, leases and loans secured by chattel mortgages.

The securitisation arrangement involves the transfer of equitable title in these receivables to a special purpose securitisation trust. As regards the securitisation of hire purchase and lease receivables, equitable title to the underlying goods financed is also transferred to the trust. However, legal title in both the receivables and the goods is retained by the entity.

The entity also retains all rights and obligations under the hire purchase agreement as against the hirer.

Whilst the trust can perfect its title in the receivables and the goods, this will only occur in exceptional circumstances. To date, this has not occurred.

The entity did not quote its ABN when acquiring a car from the dealer and the dealer invoiced the entity for the LCT amount.

The entity has at all times been part of a GST Group but is not the representative member.

The entity submits that in purchasing vehicles for supply under hire purchase agreements, technically it was required to account for a LCT liability upon the "sale" of those vehicles under the hire purchase agreements. However, as this LCT liability was equal to the amount of LCT collected by the dealer from the entity, the correct amount of LCT was remitted upon the transaction overall.

Relevant legislative provisions

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) subsection 2-5(2)

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) section 5-5

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) subsection 5-10(1)

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) subsection 5-10(2)

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) section 9-5

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) subsection 9-15(2)

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) subsection 13-10(2)

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) Section 15-10

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) section 15-15

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) section 15-25

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) section 15-30

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) subsection 16-5(1)10

A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) section 16-10

Reasons for decisions

Question 1

Summary

The Commissioner confirms that a decreasing LCT adjustment arises, under section 15-30 of the LCT Act, where the entity acquires a luxury car for supply under a hire purchase agreement in circumstances where it did not quote its ABN when acquiring the car.

However, section 16-10 of the LCT Act provides that as the entity is a member of a GST group, it is the representative member that has the adjustment.

Detailed reasoning

Under section 9-5 of the LCT Act, an entity is entitled to quote its ABN when it acquires a car as trading stock. Therefore, the entity was entitled to quote when it acquired a luxury car from the dealer, for sale by way of hire purchase.

However, section 9-5 of the LCT Act makes quoting an entitlement, and not a compulsory requirement.

Pursuant to subsection 9-15(2) of the LCT Act, a quote is not effective unless it is made at or before the time of the supply.

Therefore, as the entity did not quote its ABN at or before the time of the supply, then the quoting system was not available to it.

Subsection 15-30(1) of the LCT Act provides that an entity has a decreasing LCT adjustment if:

· it was supplied with a luxury car; and

· luxury car tax was payable on the supply because the entity did not quote for the supply; and

· it was registered at the time of the supply; and

· it intends to use the car for a quotable purpose; and

· it has only used the car for a quotable purpose.

This is supported by the Tax Office view, which is contained in the Guide to Luxury Car Tax (NAT 3394).

NAT 3394 provides that an entity has a change of use adjustment if the entity did not quote its ABN on a purchase or importation of a luxury car, but should have because it intended to use, and have only used, the car for a quotable purpose.

Therefore, a change of use adjustment has occurred when the entity did not quote on the acquisition of a luxury car, as its intention was to use the car for a quotable purpose.

Section 15-30 of the LCT Act points out that the entity has an adjustment, rather than an entitlement to an adjustment. As such, when the entity did not quote for a car to be sold by way of hire purchase, section 15-30 of the LCT Act requires an adjustment, because the entity only held the car for a quotable purpose.

According to subsection 2-5(2) of the LCT Act, the quoting system prevents the tax becoming payable until the car is sold or imported at the retail level.

Furthermore, section 5-5 of the LCT Act provides that LCT is payable on any taxable supply of a luxury car that an entity makes.

Under subsection 5-10(1) of the LCT Act, an entity makes a taxable supply of a luxury car if it makes the supply of a luxury car in the course or furtherance of an enterprise that it carries on, that supply is connected with Australia, and the entity is registered or required to be registered.

However subsection 5-10(2) of the LCT Act, provides that an entity does not make a taxable supply of a luxury car if the recipient quotes for the supply of the car; or the car is more than 2 years old; or an entity exports the car in circumstances where the export is GST-free under Subdivision 38-E of the GST Act.

This means that the LCT Act is designed to prevent the tax becoming payable until a car is sold or imported at the retail level. Therefore, in this instance the LCT was remitted by the wrong entity.

The decreasing LCT adjustment is equal to the amount of LCT that was payable on the supply, as outlined in subsection 15-30(2) of the LCT Act.

Division 16 of the LCT Act provides that the representative member of a GST group deals with all of the LCT liabilities and entitlements of the group.

Subsection 16-5(1) of the LCT Act provides that LCT payable on a taxable supply of a luxury car for which a member of a GST group would be liable is payable by the representative member and is not payable by the member that would otherwise be liable.

Similarly subsection 16-10(1) of the LCT Act provides that a LCT adjustment that a member of a GST group has is to be treated as if that member did not have the adjustment and the representative member had the adjustment.

Please ensure that for future supplies the correct treatment is followed, as indicated above.

Note: In this particular case the implication of a hirer defaulting under the hire purchase agreement is that the entity's GST group representative member now has to account for numerous LCT adjustments.

Question 2

Summary

The Commissioner confirms that a decreasing LCT adjustment arises, under section 15-10 of the LCT Act, where the entity terminates a hire purchase agreement as a result of default by the hirer.

However, section 16-10 of the LCT Act provides that as the entity is a member of a GST group, it is the representative member that has the adjustment.

Detailed Reasoning

Pursuant to paragraph 15-5(1)(b) of the LCT Act, any event which has the effect of changing the consideration for a supply of a luxury car is a LCT adjustment event.

Section 15-25 of the LCT Act provides that an entity has a decreasing luxury car tax adjustment for a supply if the corrected luxury car tax amount is less than the previously attributed luxury car tax amount. The decreasing luxury car tax adjustment equals the difference between the previously attributed luxury car tax amount and the corrected luxury car tax amount.

Thus, it needs to be determined whether the corrected luxury car tax amount is less than the previously attributed luxury car tax amount.

Previously attributed luxury car tax amount:

According to section 15-15 of the LCT Act, the previously attributed luxury car tax amount for a supply of a luxury car is:

(a)    the amount of any luxury car tax that was attributable to a tax period in respect of the supply; plus

(b)   the sum of any increasing luxury car tax adjustments, under this Subdivision, that were previously attributable to a tax period in respect of the supply; minus

(c)    the sum of any decreasing luxury car tax adjustments, under this Subdivision, that were previously attributable to a tax period in respect of the supply.

GSTR 2000/35 provides the ATO view about supplies and acquisitions made on a progressive or periodic basis. Paragraph 66 of GSTR 2000/35 provides that hire purchase agreements are not progressive supplies.

The Explanatory Memorandum to the LCT Act provides that the LCT payable is attributable to the same tax period that the GST on the supply is attributable under Division 29 of the GST Act. The attribution rules are therefore the same for GST and LCT and for any supply of goods under an ordinary sale agreement. Accordingly, under a hire purchase agreement, the supply of the thing is treated to have been made in the tax period that the hire purchase agreement was entered into.

For the purposes of subsection 15-15(a) of the LCT Act, the amount of LCT that should have attributed to the tax period in respect of the supply of the luxury car should be worked out based on the full price of the car.

There are no amounts to be added or deducted from the above amount pursuant to subsections 15-15(b) and (c) of the LCT Act.

Corrected luxury car tax amount:

Subsection 15-10(c) of the LCT Act provides the following in relation to the corrected luxury car tax amount:

as a result of that adjustment event or those adjustment events, the previously attributed luxury car tax amount for the supply no longer correctly reflects the amount of luxury car tax on the supply (the corrected luxury car tax amount), taking into account any luxury car tax adjustments relating to the supply.

Thus, to determine what the corrected luxury car tax amount is, first it must be determined whether an adjustment event has occurred which has resulted in the previously attributed luxury car tax amount not being correct.

Pursuant to paragraph 15-5(1)(b) of the LCT Act, any event which has the effect of changing the consideration for the supply is a luxury car tax adjustment event.

In relation to the agreement we are of the view that, where there is a termination by way of default, there has been a decrease in the consideration for the supply of the luxury car under a hire purchase agreement. On that basis, where the hirer defaults on hire purchase payments, we are of the view that the consideration has changed and accordingly has resulted in an adjustment event.

The adjustment event has reduced the consideration for the supply. Accordingly, the corrected luxury car tax amount needs to be calculated on the new (reduced) consideration for the supply. As a result, this corrected luxury car tax amount will be less than the previously attributed luxury car tax amount. Therefore, a decreasing adjustment has arisen under section 15-10 of the LCT Act.

As the entity is a member of a GST group it is the representative member that has the adjustment.

Additional information

Subsection 13-10(2) of the LCT Act provides that a LCT adjustment must be made within 4 years after the supply or importation to which the adjustment relates.

Question 3

Summary

The Commissioner confirms that the response to question 2 above is not impacted, pursuant to receivables arising under hire purchase agreements were assigned to a special purpose securitisation trust in return for payment received from the trust; provided the trustee does not exercise its right to take legal ownership under the agreement.

Detailed reasoning

The facts of this case establish that the entity's securitisation arrangement involves the transfer of equitable title in receivables to a special purpose securitisation trust. As regards the securitisation of hire purchase and lease receivables, equitable title to the underlying goods financed is also transferred to the trust. However, we are informed that the legal title in both the receivables and the goods is retained by the entity.

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.

In line with GSTR 2004/4 we are of the view that the assignment of receivables does not change the underlying supply and the assignor retains the obligation to make the underlying supply and remit any LCT liability in respect of that supply. It follows that, although the entity has assigned the relevant receivables, it remains the supplier of the relevant goods.

When a customer defaults and the goods are repossessed, the hire purchase agreement is terminated. This means that future instalments will no longer be payable, resulting in a decrease in the agreed consideration for the supply of the goods under the purchase agreement (see answer to question 2).

Accordingly, an entity has an adjustment event under the LCT Act when a customer defaults and the agreement is terminated.

In this case according to the facts provided, the entity's group representative has a decreasing adjustment when a customer defaults and the agreement is terminated. The decreasing adjustment is available to the representative provided the trustee does not exercise its right to take legal ownership under the agreement.

Note: In this particular case the implication of a hirer defaulting under the hire purchase agreement is that Macquarie's GST group representative member now has to account for numerous LCT adjustments.