Edited version of your private ruling

Authorisation Number: 1012581917513

Ruling

Subject: Effective assumption of a hire purchase contract

Question 1

Is Entity A entitled to a deduction for the interest on payments made to the financier?

Answer

Yes

Question 2

Is Entity A entitled to a deduction for depreciation on items which are the subject of the Hire Purchase Agreement?

Answer

Yes

Question 3

Is Entity A entitled to claim an input tax credit on the hire purchase payments they have made, where the tax invoice is made out to Entity B?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2009

Relevant facts and circumstances

Entity A carry on an enterprise and are registered for GST.

Entity A lease a commercial property that has been fitted with equipment purchased by the previous tenants (Entity B)

Entity B had acquired the equipment fitted into the commercial premises under a Hire Purchase Agreement with a financier.

Upon entry into the commercial property by Entity A, Entity A and Entity B entered into the Deed of Assignment.

The Deed of Assignment sets out that Entity B (as Assignor) owe the financier an amount (the Debt) under the Hire Purchase Agreement. The Debt is the remaining hire purchase payments (installments) that are required to be made by Entity B under the Hire Purchase Agreement with the financier.

Under the Deed of Assignment the Assignor has agreed to assign the Debt and Entity A (as Assignee) agrees to accept the Debt.

The financier is not party to the Deed of Assignment, however will be notified that the Debt (i.e. installment payments) has been assigned.

The Hire Purchase Agreement (between Entity B and the financier) has not been rescinded upon entry by Entity A and Entity B into the Deed of Assignment. Nor is there any tripartite agreement between the parties (Entity A, Entity B and the financier) in respect of the assignment of equipment under hire purchase.

The equipment purchased under the Hire Purchase Agreement has been used by Entity A since it began occupying the commercial property.

Pursuant to the terms of the Deed of Assignment Entity A has been making the payments of the hire purchase installments since occupying the commercial property.

The financier has issued tax invoices in the name of Entity B and not Entity A in respect of the Hire Purchase Agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 8-1

A New Tax System (Goods and Services Tax) Act 1999 section 11-10

A New Tax System (Goods and Services Tax) Act 1999 section 29-70

Reasons for decision

Question 1

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows you a deduction for any loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in the carrying on of a business, to the extent that it is not of a private, capital or domestic nature.

Whether interest has been incurred in the course of gaining or producing assessable income generally depends on the purpose of the borrowing and the use to which the borrowed funds are put.

Where a borrowing is used to acquire an assessable income producing asset, or relates to expenses of an assessable income producing activity, the interest on this borrowing is considered to be incurred in the course of gaining or producing assessable income: Taxation Ruling TR 95/25.

After considering the arrangement as a whole, i.e. Entity A have been making hire purchase payments for the use of the assets, we accept the component of the payments Entity A make in respect of the equipment, which Entity A have identified as interest, has been incurred in producing Entity A's assessable income, or necessarily incurred in carrying on Entity As business. Entity A are therefore entitled to claim a deduction for the interest component of the payments made to the financier.

Question 2

Division 40 of the ITAA 1997 outlines that you can deduct an amount equal to the decline in value of a depreciating asset (an asset which has a limited effective life and that is reasonably expected to decline in value over time it is used) that you hold.

Item 6 of the table under section 40-40 states a depreciating asset that an entity (the former holder) would, apart from this item, hold under this table (including by another application of this item) where a second entity (also the economic owner) possesses the asset, or has a right as against the former holder to possess the asset immediately, and has the right as against the former holder the exercise of which would make the economic owner the holder under any item of this table and it is reasonable to expect that the economic owner will become its holder by exercising the right, or that the asset will be disposed of at the direction and for the benefit of the economic owner.

Entity A hold the assets under item 6 of the table under section 40-40 of the ITAA 1997 because, although Entity A are not the legal owner until they exercise their option to purchase, Entity A have possession of the assets now and can exercise the option to become their legal owner. Entity A are reasonably expected to exercise that option because the final payment will be well below the expected market value of the assets at the end of the agreement. The financier would normally be the holder under item 10 of the table but item 6 makes it clear that the legal owner is not the holder.

Entity A are considered the holder of the depreciating assets therefore Entity A are entitled to deduct the decline in value of the depreciating assets under Division 40.

Additional Information

We note that some of the assets at clause 8 of the Hire Purchase Agreement may not be considered depreciating assets but may be capital items which are covered under Division 43 of the ITAA 1997.

Question 3

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you can claim an input tax credit for any creditable acquisitions that you make.

Section 11-5 of the GST Act defines the term creditable acquisition. It states:

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 29-10 of the GST Act sets out the attribution rules in respect of input tax credits for creditable acquisitions. Relevantly, in order to claim an input tax credit, subsection 29-10(3) of the GST Act requires you hold the tax invoice for the creditable acquisition.

Tax invoices are defined in subsection 29-70(1) of the GST Act. Subsection 29-70(1) sets out the requirements of a tax invoice as follows:

(1) A tax invoice is a document that complies with the following requirements:

(a) it is issued by the supplier of the supply or supplies to which the document relates, unless it is a *recipient created tax invoice (in which case it is issued by the *recipient);

(b)  it is in the *approved form;

(c)  it contains enough information to enable the following to be clearly ascertained:

(i)  the supplier's identity and the supplier's *ABN;

(ii)  if the total *price of the supply or supplies is at least $1,000 or such higher amount as the regulations specify, or if the document was issued by the recipient - the recipient's identity or the recipient's ABN;

(iii)  what is supplied, including the quantity (if applicable) and the price of what is supplied;

(iv)  the extent to which each supply to which the document relates is a *taxable supply;

(v)  the date the document is issued;

(vi)  the amount of GST (if any) payable in relation to each supply to which the document relates;

(vii)  if the document was issued by the recipient and GST is payable in relation to any supply - that the GST is payable by the supplier;

(viii)  such other matters as the regulations specify;

(d)  it can be clearly ascertained from the document that the document was intended to be a tax invoice or, if it was issued by the recipient, a recipient created tax invoice.

However, subsection 29-70(1A) relevantly states:

(1A) A document issued by an entity to another entity may be treated by the other entity as a *tax invoice for the purposes of this Act if:

(a)  it would comply with the requirements for a tax invoice but for the fact that it does not contain certain information; and

(b)  all of that information can be clearly ascertained from other documents given by the entity to the other entity.

In this case, Entity A submit that they are entitled to claim an input tax credit on the basis that the payments made periodically in respect of the Hire Purchase Agreement are a creditable acquisition. Further the non-issue of tax invoices to Entity A should not change the nature of the acquisition.

In this case we do not agree with this submission. Relevantly we consider that the payment made by Entity A under the terms of the Deed of Assignment will not satisfy the requirements of a creditable acquisition under section 11-5 of the GST Act for the reasons being:

• Entity A does not hold a valid tax invoice from either the financier or Entity B, and

• That there is no valid and/or proper hire purchase agreement between the financier and Entity A.

Accordingly it is our view that the when Entity A makes the payment to the financier it is not for any acquisition of the equipment under the Hire Purchase Agreement.

For GST purposes, hire purchase has the meaning given by section 995-1 of the ITAA 1997 which states:

hire purchase agreement means:

(a) a contract for the hire of goods where:

(i) the hirer has the right, obligation or contingent obligation to buy the goods; and

Note: An example of a contingent obligation is a put option.

(ii) the charge that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods; and

(iii) title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised; or

(b) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid.

Essentially, hire purchase agreements represent financing arrangements which facilitate the sale and purchase of goods. Accordingly for GST, hire purchase agreements will be treated as a sale of goods and a separate supply of finance. The meaning of supply is provided in section 9-10 of the GST Act and includes a supply of goods. GSTR 2006/9 at paragraph 22 lists a number of propositions in relation supplies. Proposition 2 states that "Generally, for every supply there is a recipient and an acquisition".Therefore, it must be determined if Entity A made an acquisition of goods in relation to this hire purchase.

The meaning of "acquisition" is provided in section 11-10 of the GST Act. Subsection 11-10(1) of the GST Act states that "An acquisition is any form of acquisition whatsoever". Subsection 11-10(2) of the GST Act provides that, without limiting subsection 11-10(1) of the GST Act, an acquisition includes, among other things, an acquisition of goods. An acquisition of goods usually occurs when there is a transfer of ownership of goods from the supplier to the recipient of the supply.

Goods and services tax ruling, GSTR 2006/9 at paragraph 14 explains that 'supply' is important in relation to input tax credits because if a supply is not made an entity cannot acquire anything for a creditable purpose. Further paragraph 15 of GSTR 2006/9 states:

15. You make an acquisition if you are the recipient of a supply. That is, the supply is made to you. In most transactions concerning GST the recipient of a supply is the entity that is also provided with that supply. In contrast, some supplies are made to the recipient, but provided to another entity. Arguably, such provisions are also supplies. However, these are not relevant because there is no contractual or reciprocal relationship between the supplier and the entity being provided with the supply. An entity must have made an acquisition of a thing to satisfy the requirements of section 11-10. It is not sufficient that an entity has merely been provided with the supply. Also, an entity does not make an acquisition merely by paying for a supply.

Further in paragraph 181 to 183 of GSTR 2006/9 it states:

Creditable acquisition

181. You make a creditable acquisition if you satisfy the requirements of section 11-5. Two of the requirements of section 11-5 are that you are the recipient of a taxable supply (paragraph 11-5(b)) and that you provide or are liable to provide consideration for the supply (paragraph 11-5(c)).

Third party payer

182. The objective test discussed in paragraph 180 of this Ruling may determine that a payment an entity makes is:

• consideration for a supply made to the payer and the payer is the recipient of that supply;⁵⁵

• not consideration for a supply;⁵⁶ or

• consideration for a supply but the paying entity is not the recipient of that supply.

183. If you provide or are liable to provide consideration for a supply, but you are not the recipient of the supply, you are referred to in this Ruling as a 'third party payer'. As a third party payer you do not make a creditable acquisition in relation to your payment because the supply is not made to you as required by section 11-5. Making a payment for a supply that is made to another entity is not sufficient to make you the recipient of that supply.

The entity making the supply of the equipment under the Hire Purchase Agreement is the financier and the entity which is the recipient of the equipment is identified as Entity B. However Entity A and Entity B have entered into a Deed of Assignment in respect of the hire purchase equipment where Entity B purports to assign 'the Debt' to Entity A and Entity A has agrees to accept 'the Debt' from Entity B. This Debt (identified in the Deed) is the remaining instalment payments owed to the financier by Entity B under the Hire Purchase Agreement.

The purported assignment between Entity A and Entity B does not have any of the features that are typical of a hire purchase as defined above. Further Entity A has not itself entered into a hire purchase agreement with the financier directly such that they are identified as the acquirer of the equipment. Rather it is clear from the documentation provided that the equipment remains under hire purchase to Entity B.

Consistent with paragraph 183 of GSTR 2006/9 it is our view that when Entity A agrees to make the payment to the financier (under the terms of the Deed of Agreement) it is not as consideration for the acquisition of the equipment by Entity A under the Hire Purchase Agreement. Rather, they are merely making the payment for the supply made to Entity B.

As Entity A has not entered into a hire purchase agreement with the financier or Entity B, is not in possession of a tax invoice as described in subsection 29-70(1) of the GST Act, and has not made an acquisition of the equipment under the Hire Purchase Agreement we do not consider that they have made any creditable acquisition for the purposes of paragraph 11-5 of the GST Act. Therefore Entity A is not entitled to an input tax credit.