Accounting for GST in hire purchase arrangements

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Hire purchase can be a convenient way to finance plant and equipment, a passenger car or a fleet of vehicles.

With hire purchase, a financier buys the goods from a vendor and then, similar to a leasing arrangement, retains ownership of the items until the hire purchase agreement is concluded. During the course of the agreement, you or your business has the right to use the equipment and, at the end of the term, you own it.

Unlike a lease, a hire purchase gives you the option to choose if you want to make a final balloon payment. Leases require a balloon payment, which reflects the value of the equipment or vehicle at the end of the term. Hire purchase payments are based on the total purchase price inclusive of GST, plus interest charges, duties and other fees. All supplies under the agreement are taxable.

Credit under a hire purchase agreement, which is separate and disclosed by the supplier is not considered an input taxed supply. Consequently, all hire purchase agreements are treated equally in terms of GST, regardless of credit element in the contract — the full amount payable is subject to the tax.

Claiming input tax credits

If you use the goods you acquire under a hire purchase agreement in your business, you may be able to claim a GST credit for the tax included in the purchase price. Businesses that account for GST on a cash basis must claim the input tax credit as if they used the accrual method. In other words, the business claims the credit in the tax period when it receives an invoice from the financier or when it makes the first payment, whichever comes first.

Your business must have a tax invoice for the acquisition when it lodges its Business Activity Statement (BAS) for the tax period.

Financiers are entitled to full input tax credits for the acquisitions they make relating to the agreement, including the hired goods and other goods and services relating to the hire purchase activities. This will reduce costs for the hirer, provided the business is GST registered. Those not entitled to input tax credits will pay more; the costs will increase because the GST is added to the entire amount the financier charges.

Critical elements on both sides of the transaction:

1. Financiers must ensure the agreement allows them to recover the full GST amount payable on both the principal and the credit components at the start of the agreement. Unless they recover the full GST up front, they will be out of pocket when required to remit the tax to the Australian Taxation Office (ATO).

2. Hirers must ensure they obtain a tax invoice from the financier at the start of the agreement that includes both the principal and credit elements of the transaction. This allows them to claim an input tax credit for the full amount of the tax paid. This is the case even if the hirer accounts for GST on a cash basis, as it will be entitled to claim the full input tax credit up front.

If you are considering new plant and equipment or vehicles for your business, consult your Westlawn Business Services Accountant to determine whether a hire purchase, lease arrangement or loan is the best option for your business.

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18 December 2013

Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers.

Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

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