Edited version of your written advice

Authorisation Number: 1012799456570

Ruling

Subject: GST and pawnbroking

Question 1

Is the taxpayer (a pawnbroker) entitled to claim input tax credits for acquisitions which relate to their supply of a loan to a customer on the security of pawned goods?

Answer

No. The taxpayer is not entitled to claim input tax credits for acquisitions which relate to their supply of a loan to a customer on the security of pawned goods, as the loan is an input taxed financial supply. However, the taxpayer may be entitled to claim full input tax credits (ITCs) for these acquisitions if they do not exceed the Financial Acquisitions Threshold (FAT).

Question 2

Where forfeited pawned goods are sold after the expiry of the loan period, to a third party which is not registered for GST, is the acquisition and the sale of the forfeited pawned goods subject to GST?

Answer

Whether or not the acquisition and sale of the forfeited goods are subject to GST will depend on the circumstances under which they are acquired and sold. Refer to the Reasons for Decision below.

Question 3

Are there any GST implications associated with the purchase or sale of second-hand goods by the taxpayer in the normal course of your business?

Answer

Yes. There are GST implications associated with the purchase or sale of second-hand goods by the taxpayer in the normal course of their business. Refer to the Reasons for Decision below.

Relevant facts and circumstances

The taxpayer operates a pawnbroking business in New South Wales.

The taxpayer is registered for GST

Pawnbroking in New South Wales is regulated by the Pawnbroker and Second-Hand Dealers Act 1996.

The following 3 scenarios are considered in relation to the taxpayers' enterprise:

1. A customer enters into an arrangement with you under which they leave second-hand goods (pawned goods) as security for a short term loan. At the end of the term of the loan, the customer is required to pay a consignment amount which comprises a principle and an interest component. When the full consignment amount is paid back, the pawned goods are returned to the customer.

2. In the case where the customer fails to pay back the full consignment amount (principle and interest) in the agreed time period, the pawned goods are forfeited and the taxpayer is entitled to sell the pawned goods to redeem the debt associated with the loan.

3. A customer sells their second-hand goods for an agreed amount. These are then on-sold to a third party. No loan is made to the customer in this instance.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Division 11

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5

A New Tax System (Goods and Services Tax) Act 1999 Subsection 11-15(4)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 40-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subdivision 66A

A New Tax System (Goods and Services Tax) Act 1999 Section 66-5

A New Tax System (Goods and Services Tax) Act 1999 Section 66-10

A New Tax System (Goods and Services Tax) Act 1999 Section 66-15

A New Tax System (Goods and Services Tax) Act 1999 Division 105

A New Tax System (Goods and Services Tax) Act 1999 Section 105-15

Pawnbroker and Second-Hand Dealers Act 1996 (NSW) Subsection 32(1)

Reasons for decision

Question 1

The taxpayer is entitled to the input tax credits for any creditable acquisitions they make under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Section 11-5 of the GST Act provides:

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.

When considering creditable purpose, the general rule under Division 11 of the GST Act is that the taxpayer will acquire a thing for a creditable purpose to the extent that the taxpayer acquires it in carrying on your enterprise. However, the taxpayer will not acquire something for a creditable purpose where that thing is acquired in relation to the making of input taxed supplies.

In scenario 1, the taxpayer is making an input taxed financial supply under subsection 40-5(1) of the GST Act when in the course of their enterprise, the taxpayer provides a loan to a customer that is secured by pawned goods and the taxpayer charges the customer a fee (consignment amount) which includes a principal and interest component. Under the general rule of Division 11 of the GST Act, the acquisitions the taxpayer makes that relate to their supply of this loan are not creditable acquisitions.

However, one of the exceptions to the general rule under Division 11 is where the taxpayer does not exceed the financial acquisition threshold (FAT). This exception is provided under subsection 11-15(4) of the GST Act. The taxpayer may be entitled to full input tax credits for their acquisitions in relation to their provision of financial supplies where the taxpayer does not exceed the FAT.

Further information to assist in determining whether the taxpayer has exceeded the FAT can be found at: www.ato.gov.au and also by reference to Goods and Services Tax Ruling GSTR 2003/9 Goods and Services Tax: Financial Acquisitions Threshold.

Question 2

In scenario 2, consideration is given to the GST implications of the acquisition and sale of forfeited pawned goods where the customer fails to pay back the full consignment amount for the pawned goods.

Sale of forfeited pawned goods

The GST treatment of the sale of forfeited pawned goods after the expiry of the loan period depends on whether or not ownership of the forfeited pawned goods transfers to the taxpayer prior to the sale.

It is noted that there is no provision in the Pawnbrokers and Second-Hand Dealers Act 1996 (Pawnbrokers Act) that automatically provides for the passing of ownership of forfeited goods to pawnbrokers prior to the sale. Subsection 32(1) of the Pawnbrokers Act, provides that unredeemed goods are not to be bought by or on behalf of a pawnbroker. Therefore, the taxpayer is not able to take ownership of the pawned goods at any time.

Division 105 of the GST Act then becomes relevant to the sale of the forfeited pawned goods after the expiry of the loan period. In particular section 105-5 of the GST Act states:

Supplies by creditors in satisfaction of debts may be taxable supplies

(1) You make a taxable supply if:

(a) you supply the property of another entity (the debtor ) to a third entity in or towards the satisfaction of a debt that the debtor owes to you; and

(b) had the debtor made the supply, the supply would have been a *taxable supply.

(2) It does not matter whether:

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

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

(3) However, the supply is not a *taxable supply if:

(a)  the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

(b)  if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

(4) This section has effect despite section 9-5 (which is about what is a taxable supply).

(*denotes a term defined in section 195-1 of the GST Act)

When the taxpayer sells the forfeited pawned goods to a third party after the expiry of the loan period, to recover the money owed to them, section 105-5 of the GST Act will operate to make that sale subject to GST in some circumstances. In the circumstances where the sale of the pawned goods would have been taxable had the owner (that is, the customer) made the sale themselves, the taxpayer would be required to remit GST to the ATO when they sell these forfeited pawned goods to third parties (subsection 105-5(1) of the GST Act).

However, the sale will not be subject to GST if the owner (that is, the customer) provides the taxpayer with a written notice stating that the sale of the pawned goods would not be taxable if the owner were to sell the goods themselves (paragraph 105-5(3)(a) of the GST Act). If the taxpayer cannot obtain such a notice and the taxpayer believes on the basis of reasonable information that the sale would not be a taxable supply if the customer had made it themselves (for instance where the customer is not registered or required to be registered for GST), then the sale of the pawned goods by the taxpayer would not be subject to GST (paragraph 105-5(3)(b) of the GST Act).

Note the GST registration status of the third party to whom the forfeited pawned goods are sold is not relevant in these matters.

Acquisition of forfeited pawned goods

Subdivision 66-A of the GST Act operates to allow input tax credits to be claimed for acquisitions of second-hand goods in some circumstances even though GST was not payable on the original supply of the goods to you. However, for subdivision 66-A of the GST Act to apply, the goods must have been acquired by the taxpayer for the purpose of sale or exchange. Where goods have been acquired as security in a pawn broking arrangement, they are not acquired for the purposes of sale or exchange and are therefore not creditable acquisitions for the purposes of subdivision 66-A of the GST Act.

It follows then that the acquisition of the forfeited pawned goods by the taxpayer are not creditable acquisitions as these goods have not been acquired by the taxpayer for sale or exchange but were acquired as a security for a loan the taxpayer provided. The subsequent sale of the goods at the end of the loan period is in satisfaction of the debt owed to the taxpayer by their customer. The taxpayer is therefore not entitled to claim input tax credits in relation to the acquisition of forfeited pawned goods in these circumstances.

Question 3

In scenario 3, consideration is given to the GST implications where a customer sells their second-hand goods to the taxpayer for an agreed amount. The taxpayer then on sells these second-hand goods to third parties. No loan is made to the customer in this instance.

As stated in Question 2 above, Division 66 of the GST Act allows the taxpayer in some circumstances, to claim an input tax credit for an acquisition of second-hand goods even though the supply to the taxpayer was not a taxable supply.

Relevantly, section 66-5 of the GST Act states:

Creditable acquisitions of second-hand goods:

(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 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 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).

As the taxpayer has purchased these second-hand goods from their customers (that is the taxpayer takes ownership of the goods), and the taxpayer has purchased the second-hand goods for the purpose of sale or exchange, subsection 66-5(1) of the GST Act will operate to allow the taxpayer to claim input tax credits on their acquisition of the second-hand goods subject to subsection 66-5(2) of the GST Act.

Calculating the amount of the input tax credit for creditable acquisitions of second-hand goods

The amount of the input tax credit for creditable acquisitions of second-hand goods from an unregistered entity is calculated under section 66-10 of the GST Act, and is calculated as follows:

(1) If the taxpayer acquired the second-hand goods for more than $300, the amount of the input tax credits for the second-hand goods is the lesser of:

• 1/11th of the consideration that the taxpayer provides, or are liable to provide, for the acquisition; or

• the amount of the GST payable on the subsequent taxable supply of the second-hand goods.

(2) If the taxpayer acquired the second-hand good for $300 or less, the amount of the input tax credit is equal to1/11^th of the consideration that the taxpayer provides, or is liable to provide, for the acquisition.

Attributing input tax credits for creditable acquisitions of second-hand goods

Under section 66-15 of the GST Act, input tax credits for creditable acquisitions of second-hand goods are attributed as follows:

• If the taxpayer acquired the second-hand goods for less than $300, the normal attribution rules will apply. That is, as the taxpayer accounts on a cash basis, the input tax credit is attributed in the tax period in which the taxpayer provides the payment for the second-hand goods.

• If the taxpayer acquires second-hand goods for more than $300 and the taxpayer accounts on a cash basis, they can claim the input tax credit only when they make a taxable supply (that is, sell) the second hand-goods and only to the extent that the taxpayer receives payment for the sale of the second hand-goods.

Sale of second-hand goods

GST is payable on taxable supplies. Pursuant to section 9-40 of the GST Act, you must pay the GST payable on any taxable supply that you make.

A supply is a taxable supply if all the conditions under section 9-5 of GST Act are satisfied. Section 9-5 of the 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.

When the taxpayer on sells second-hand goods that they have acquired as per Scenario 3, section 9-5 of the GST Act will apply to the taxpayer and the sale of the second-hand goods will be a taxable supply as they have made the supply for consideration, in the course of furtherance of their enterprise, the supply is connected with Australia and they are registered for GST. There are no provisions in the GST Act that will make the sale of the second hand goods GST-free or input taxed. The taxpayer will have to remit GST to the ATO in relation to this sale.