Edited version of your private ruling

Authorisation Number: 1012598849237

Ruling

Subject: GST and hire purchase agreement

Question 1

Are the Plant and Equipment charges (also referred to as Equipment Licence Fee) under the second agreement, consideration for the supply of use of the Plant and Equipment under a hire purchase agreement for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the Plant and Equipment charges (also referred to as Equipment Licence Fee) under the second agreement are consideration for the supply of use of the Plant and Equipment under a hire purchase agreement for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 2

Will the liability for Goods and Services Tax (GST) arises at the time of monthly invoices for the Administration Fee and the Equipment Licence Fee are issued by the supplier?

Answer

GST on the total value including the capital component and finance component of the supply of Plant and Equipment is attributable to the tax period in which you receive any consideration or issue the invoice, whichever is the earlier. The hire purchase agreement may constitute an invoice.

The usual attribution rules will apply for the supply of Administration provided that the supply is not made on a progressive or periodic basis. Please refer to the reasons for decision.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

• ABC is a member of a GST group.

• XYZ has previously operated a small supermarket store.

• XYZ subsequently secured a lease on a significantly larger store, but was unable to obtain further finance to fund the fit out.

• To enable the new store fit out to proceed, XYZ entered into an Agreement with ABC. Under this agreement XYZ will sell their assets to ABC for an amount of $XXX plus GST.

• The definition of Assets under the Agreement means Goodwill, Plant and Equipment, Records and Systems. Operating Assets means the Plant and Equipment, Records and Systems.

• An amount of $YYY (GST exclusive) was allocated in respect of Plant and Equipment and $ZZZ was allocated to Goodwill, Records and Systems.

• ABC will complete the fit out and contribute an additional amount of Plant and Equipment already owned by ABC to the business operation of XYZ.

• XYZ and ABC agree that the agreement does not provide for the supply of a going concern as defined in the GST Act.

• A condition of the Agreement was that ABC entering into second agreement granting XYZ the right to manage the newly fitted out store. This agreement was entered into for a period of ten years.

• Pursuant to the second agreement, XYZ is entitled to the gross receipts from the business and responsible for the opening stock and cash float as well as meet all operating costs including rent, employee costs, the purchase of products etc.

• XYZ must pay ABC the following amounts:

(i) an Administration Fee of $MMM per annum; and

(ii) a monthly Equipment Licence Fee, set initially at $NNN per

month.

• The monthly Equipment Licence Fee is paid by XYZ for the supply of Plant and Equipment made by ABC and may be varied for additional or "dead" equipment. The Administration Fee to be adjusted after five years for CPI movements.

• The Equipment Licence Fee referred to in the second agreement covers the Plant and Equipment acquired from XYZ and the Plant and Equipment supplied by ABC already owned by them.

• There are no distinction between the term used as Equipment Licence Fee and the Plant and Equipment charges.

• XYZ has a Call Option to acquire the assets including the Goodwill during the Call Option period. The Call Option period starts five years from the commencement of the second agreement date or a cease date event.

• Subsequent to the expiration of the Call Option at the end of year five, XYZ has a first and last right to purchase the Assets at a purchase price equivalent to the market value of the Assets.

• The Call Option contract provides that XYZ may purchase the assets from ABC by paying to ABC the purchase price of $ZZZ plus the Equipment Value plus GST.

• The sliding amount for Plant and Equipment set out in the Schedule to the Call Option varies from the first month of the arrangement to the 60^th month.

• The Plant and Equipment Value under Schedule indicates the diminishing value of the Plant and Equipment. There is an interest component add to the value of the Plant and Equipment and the repayment amount is $NNN.

• ABC is not permitted to dispose of the Assets during the Call Option period.

• In the event that XYZ does not exercise the Call Option in the five year period, the second agreement entitles ABC to dispose of the Assets to any person, provided that it gives XYZ a right of refusal on the proposed sale. If XYZ chooses to exercise its right of refusal to buy the Assets, the terms on which it acquires the Assets must be no less favourable to ABC than the proposed sale to another party.

• ABC has the right, in addition to whatever other remedies it may have at law or equity, to immediately terminate the second agreement by giving written notice to XYZ accordingly.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Division 19,

A New Tax System (Goods and Services Tax) Act 1999 section 29-5,

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

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Definition of Hire Purchase Agreement

A "hire purchase agreement" for GST purposes is defined in section 995-1 of the Income Tax Assessment Act 1997 as follows:

"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 to the goods does not pass to the hirer until the optionreferred to in subparagraph (a)(i) is exercised; or

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

In other words, the purchaser has possession of and right to use the goods, as well as an option to purchase the goods, exercisable at or before the end of the hire period.

Essentially, hire purchase agreements represent financing arrangements which facilitate the sale and purchase of goods. Accordingly for GST purposes, hire purchase agreement will be treated as a sale of goods and a separate supply of finance.

Goods and Services Tax Ruling: GSTR 2000/29 is about attribution of GST payable, input tax credits and adjustments under the GST Act. According to paragraph 197 of GSTR 2000/29 the hire purchase agreement is a method by which the 'hirer' purchases the goods. It is in commercial substance a method by which the 'hirer' purchases goods on deferred payment terms.

Unlike a lease or hire arrangement, the capital cost of the goods under a hire purchase agreement is paid off over the term of the agreement and full ownership of the goods will pass to the recipient at the time of the final payment or when the option to purchase the goods is exercised.

Under a lease agreement, there is no right or obligation to purchase the goods at the end of the contract so that a separate supply arises.

Supply of Goods

Section 195-1 of the GST Act defines 'goods' as meaning any form of tangible personal property. Personal property embraces all forms of property other than land or an interest in land. Tangible connotes a physical existence and has the effect of excluding intangibles. Therefore, a good is any form of personal property that has a physical existence but does not include intangible personal property such as intellectual property like a copyright.

The above view has been expressed in Goods and Services Tax Ruling: GSTR 2000/31 - supplies connected with Australia.

The above ruling explains the circumstances where a supply of goods also occurs by way of a hire purchase agreement. Paragraph 110 of the GSTR 2000/31 explains that where tangible personal property is the subject of a lease or hire arrangements the GST Act contemplates that the supply is a supply of goods rather than the supply of use of the goods.

Under the second agreement, ABC is making a supply of use of the goods (Operating Assets) to XYZ in managing their business activities. As explained above, the supply of use of the goods means that ABC is making a supply of the Operating Assets to XYZ and XYZ will have the possession of those Operating Assets although the title of the assets will be in the name of ABC.

Based on the terms and conditions of both agreements the ATO considers that two supplies have been made. The supply of use of the Plant and Equipment as part of the Operating Assets is considered as a supply of goods as the definition of Operating Assets clearly indicates that tangible assets have been supplied. Plant and Equipment, Records and Systems are considered as tangible assets.

Under the Agreement the consideration for the supply of Plant and Equipment as part of the Assets have been separately identified and specified under different terms and conditions. The Agreement specifies the purchase price for Plant and Equipment separately for $YYY. The remaining amount of $ZZZ has been allocated to Records and Systems including Goodwill.

As specified in the Agreement, Operating Assets do not include Goodwill which is considered as intangible assets and does not satisfy the definition of Goods.

Under the second agreement XYZ is required to pay an amount of $NNN per month as consideration for the supply of Plant and Equipment. You also confirmed that there are no distinction between the term used as Equipment Licence Fee and the Plant and Equipment charges. The consideration paid for the supply of Plant and Equipment may be varied due to additional supply of Plant and Equipment or by the removal of dead Plant and Equipment.

Under both agreements, the consideration for the supply of Plant and Equipment has been specified separately and under different terms and conditions.

The second supply under the second agreement and part of the Operating Assets is the supply of Goodwill, Records and Systems. The consideration for the supply of Goodwill, Records and Systems as part of the Operating Assets has been separately identified and specified in both agreements.

The term Administration Fee under the second agreement does not specify the inclusion of Goodwill and refers to Operating Costs. However, the consideration made under the term of Administration Fee is not relevant to the first question of this ruling request. The issue that needs to be considered is whether the consideration paid as per the second agreement is for the supply of Plant and Equipment under a hire purchase agreement.

Essential nature of a hire purchase agreement

The Commissioner expresses his view on the essential nature of a hire purchase agreement in paragraph 195 of the GSTR 2000/29. Finnemore J in Warman V. Southern Countries Car Finance Corporation Ltd W J Ameris Car Sales (1949) 2 KB 576 outlined at page 582 of his judgment, the nature of a hire purchase agreement as follows:

' A hire purchase agreement is in law, an agreement in two parts. It is an agreement to rent a particular chattel for a certain length of time. If during the period or at the end of the period the hirer does not wish to buy the chattel he is not bound to do so. On the other hand, the essential part of the agreement is that the hirer has the option of purchase, and it is common knowledge - and I suppose, common sense - that when people enter into a hire purchase agreement they enter into it not so much for the purpose of hiring, but for the purpose of purchasing, by a certain method, by what is, in effect, deferred payments, and that is done by this special kind of agreement known as a hire purchase agreement, the whole object of which is to acquire the option to purchase the chattel when certain payments have been made. (our emphasis)

The Commissioner considers that there are two basic ingredients to a hire purchase agreement, namely, a sale of goods with a financing component.

Under the broader arrangement between ABC and XYZ, the value of the Plant and Equipment has been reduced by a repayment amount of $NNN per month. The details of the repayments listed in the Schedule clearly indicate the two components to the sale of goods - the capital component and the financing component. This Schedule has listed the opening balance of the Plant and Equipment hired to XYZ, the interest component, the repayment amount of $NNN and the closing balance which would be the written down value of the Plant and Equipment.

The above repayment arrangements made in relation to the hiring of Plant and Equipment satisfy the intention of making such arrangements between ABC and XYZ. Although, there is no separate agreement between the parties in relation to the hire of Plant and Equipment, the arrangements made under both agreements satisfy the ingredients to a hire purchase agreement as explained above.

Option to purchase the goods

The other factor considered under the definition of hire purchase agreement is the option to purchase the goods, exercisable at or before the end of the hire period. This is an important fact usually included in a hire purchase agreement which is generally not available in a leasing or hiring arrangements.

The second agreement specifies the terms and conditions of the Call Option exercisable by XYZ within the first five years period from the commencement date. The Call Option contract provides that XYZ may purchase the assets from ABC by paying to ABC the purchase amount of $ZZZ plus the Equipment Value plus GST. The Equipment Value in turn varies depending on the time at which the Option is exercised.

The sliding amounts confirm that when XYZ exercise their Option to purchase the Plant and Equipment as part of the Operating Assets, they are required to pay a separate amount for the purchase of Plant and Equipment and required to pay the original purchase price of $ZZZ for the Goodwill, Records and Systems under the Agreement.

Although the second agreement states that XYZ has the Option to purchase the Assets within the first five years, the consideration that is required to be paid for the Plant and Equipment has been separately specified according to the value of the Plant and Equipment stated in the Schedule to the Agreement. The amount required to pay for the remaining assets as part of the Operating Assets remains the same amount of $ZZZ which was the original purchased price.

The terms and conditions of the Call Option to purchase the Plant and Equipment under the broader arrangement satisfy the option to purchase the goods under the definition of hire purchase agreement.

Hire purchase charges payable exceed the price of the Goods

Under the Agreement, the ABC purchased the Plant and Equipment for $YYY and when they make the supply of use of the Plant and Equipment to XYZ under the second agreement, they have included additional Plant and Equipment owned by ABC. The Schedule to the Agreement confirms that an additional amount in the form of interest has been paid by XYZ. The monthly repayment amount of $NNN includes an interest component as well as capital component and the closing balance is only reduced by the amount of the capital component.

The repayment amount and the written down value of Plant and Equipment confirm that XYZ is required to pay more than the purchase price under the hire purchase agreement for the Plant and Equipment.

Under the terms and condition of the second agreement, the title of the Plant and Equipment will not be transferred to XYZ until the Call Option is exercised by XYZ. XYZ is not required to purchase the Plant and Equipment after the Call Option period of five years. In the event that XYZ does not exercise the Call Option within the five year period, the second agreement entitles ABC to dispose of the business to any person, provided it gives XYZ a right to refusal on the proposed sale. This arrangement support the view expressed by Finnemore J as explained above and considered as the Commissioner's view as well.

The first right of refusal for XYZ to buy the Assets under the second agreement is an arrangement between the parties on how they proposed to dispose the Assets after the Call Option period. It is not an important part of the definition of hire purchase agreement.

Considering the whole arrangement the ATO is satisfied that the Plant and Equipment charges also known as Equipment Licence fee are the consideration for the supply of Plant and Equipment under a hire purchase agreement as per the second agreement.

Question 2

Summary

GST on the total value including the capital component and finance component of the supply of Plant and Equipment is attributable to the tax period in which you receive any consideration or issue the invoice, whichever is the earlier. The hire purchase agreement may constitute an invoice.

The usual attribution rules will apply for the supply of Administration under the second agreement provided that the supply is not made on a progressive or periodic basis.

Detailed reasoning

The attribution rules for the supply of goods under hire purchase agreement have been changed since 2 July 2012. Paragraph 212A of the GSTR 2000/29 states:

212A. A supply of credit under a hire purchase agreement entered into on or after 2 July 2012 is not an input taxed financial supply as it is covered by item 20 of the table in regulation 40-5.12. The supply of credit is a taxable supply where the requirements of section 9-5 of the GST Act are satisfied.

The hire purchase agreement under the second agreement was entered after 2 July 2012. The hire purchase agreement may constitute an invoice.

Section 29-5 of the GST Act provides that if you do not account for GST on a cash basis, you attribute all the GST payable on a taxable supply to the earlier of the tax period in which any of the consideration for the supply is received or an invoice for the supply is issued. This means that you may have to account for GST payable on a supply before actually receiving payment for the supply.

Therefore, GST is payable on the total value including the capital and finance component of the supply of Plant and Equipment under the hire purchase agreement is attributable in the tax period in which you entered in to the second agreement, if you are reporting GST on a monthly basis and accounting for GST on a non-cash basis.

The usual attribution rules under section 29-5 of the GST Act will apply on the taxable supply made in relation to the administration fee paid by XYZ.

Please note that a special attribution rules will apply under Division 156 of the GST Act where supplies and acquisitions made for a period or on a progressive basis and where the consideration is also provided on a progressive or periodic basis. However, Division 156 of the GST Act does not apply to a supply or acquisition of goods or credit under a hire purchase agreement. (Refer to Paragraph 193A of the GSTR 2000/29)

The administration fee paid by XYZ is not a consideration for the supply of goods under a hire purchase agreement. Therefore, Division 156 of the GST Act may apply to the supply made in relation to the administration fee, provided that the supply is made for a period or on a progressive basis where the consideration is also provided on a progressive or periodic basis.