Private ruling: Goods and services tax (GST) and finance leases and hire purchase
Published: June 2015

Ruling: Q1: How do you attribute input tax credits on the acquisition you make under the finance lease agreement? | A1: You may claim the full input tax credit amount (the sum of A and B) associated with the rent amounts specified in the tax invoice in your BAS for the (particular tax period quarter) or your BAS for the (particular tax period quarter) or (particular tax period quarter).

Relevant facts and circumstances: You are registered for GST. You account for GST on a non-cash (accruals) basis. You report GST on a quarterly basis. You have entered into a finance lease agreement with X. Under this agreement X agreed to lease goods to you, which you use in your business located in Australia. X is registered for GST. X issued a tax invoice to you on a certain date. You paid the first instalment on that date. The tax invoice includes • the heading 'tax invoice' • date of issue of invoice • X's name and ABN • your name • a reference to you as being the lessee • description of goods • date of lease • the total amount of rent payable over the term of the lease • a schedule of rent payments • the total GST Some of the terms of the contract are: • Ownership of the equipment will only pass on receipt of a Payout Amount and any rent arrears or other amount owing by you to X. • You may terminate the finance lease early by paying the Payout Amount to purchase the equipment. • Upon your termination of the finance lease, you will acquire title to the equipment. • You can purchase the equipment at any point in time during the term. • You have an obligation to pay the Payout Amount if the finance lease agreement is terminated by X because of default by you on the terms of the agreement.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 subsection 7-1(1) | A New Tax System (Goods and Services Tax) Act 1999 section 9-5 | A New Tax System (Goods and Services Tax) Act 1999 section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 section 29-10 | A New Tax System (Goods and Services Tax) Act 1999 subsection 156-10(1) | A New Tax System (Goods and Services Tax) Act 1999 section 156-25 | A New Tax System (Goods and Services Tax) Act 1999 section 158-5 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: The arrangement you have entered into is a hire purchase agreement. Therefore, the supplier is not making a periodic or progressive supply to you. Hence, you can claim the full input tax credit up-front. | Detailed Reasoning - Detailed reasoning: You are entitled to input tax credits on your acquisition of the goods under the lease arrangement because you meet the requirements of section 11-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). This is because: • you are making an acquisition for a creditable purpose • the supply of the goods to you under the finance lease arrangement is subject to GST • you are providing consideration for the supply, and • you are registered for GST. Section 29-10 of the GST Act sets out input tax credit attribution rules. These rules are modified by section 156-10 of the GST Act and section 158-5 of the GST Act. Subsection 29-10(1) of the GST Act states: The input tax credit to which you are entitled for a *creditable acquisition is attributable to: (a) the tax period in which you provide any of the *consideration for the acquisition; or (b) if, before you provide any of the consideration, an *invoice is issued relating to the acquisition - the tax period in which the invoice is issued. Subsection 29-10(2) of the GST Act states: However, if you *account on a cash basis, then: (a) if, in a tax period, you provide all of the*consideration for a *creditable acquisition - the input tax credit for the acquisition is attributable to that tax period; or (b) if, in a tax period, you provide part of the consideration - the input tax credit for the acquisition is attributable to that tax period, but only to the extent that you provide the consideration in that tax period (c) if, in a tax period, none of the consideration is provided - none of the input tax credit for that acquisition is attributable to that tax period. Subsection 29-10(3) of the GST Act states: If you do not hold a *tax invoice for a *creditable acquisition when you give to the Commissioner a *GST return for the tax period to which the input tax credit (or any part of the input tax credit) on the acquisition would otherwise be attributable: (a) the input tax credit (including any part of the input tax credit) is not attributable to that tax period; and (b) the input tax credit (or part) is attributable to the first tax period for which you give to the Commissioner a GST return at a time when you hold that tax invoice. However, this subsection does not apply in circumstances of a kind determined in writing by the Commissioner to be circumstances in which the requirement for a tax invoice does not apply. Subsection 29-10(4) of the GST Act states: If the *GST return for a tax period does not take into account an input tax credit attributable to that tax period: (a) the input tax credit is not attributable to that tax period; and (b) the input tax credit is attributable to the first tax period for which you give the Commissioner a GST return that does take it into account. As you account for GST on an accruals basis, subsection 29-10(1) of the GST Act is relevant to you. You hold a valid tax invoice. Your first instalment was paid in a certain month. Section 158-5 of the GST Act provides that if an entity accounts for GST on a cash basis and they make an acquisition under a hire purchase agreement, they attribute the input tax credit on the acquisition as if they were accounting on a non-cash/accruals basis. This rule would not make a difference as to how you would attribute an input tax credit under a hire purchase agreement, because you account for GST on an accruals basis regardless of this rule. Section 156-10 of the GST Act provides a special rule for attributing input tax credits in respect of acquisitions that are for a period or on a progressive or periodic basis and for consideration that is to be provided on a progressive or periodic basis. Subsection 156-10(1) of the GST Act states: The input tax credit to which you are entitled for a *creditable acquisition that is made: (a) for a period or on a progressive basis; and (b) for *consideration that is to be provided on a progressive or periodic basis; is attributable, in accordance with section 29-10, as if each progressive or periodic component of the acquisition were a separate acquisition. In accordance with section 156-25 of the GST Act, subsection 156-10(1) of the GST Act does not apply if you account for GST on cash basis. The effect of subsection 156-10(1) of the GST Act is that in the relevant circumstances, input tax credits are claimed progressively as instalments of consideration are paid. Paragraphs 190 to 203 of Goods and Services Tax Ruling GSTR 2000/29 discuss hire purchase agreements and GST and input tax credit attribution for such agreements. They state: 190. One of the ways in which goods may be supplied is under a hire purchase agreement. The key features of a hire purchase agreement are: • hiring charges are calculated to cover the cash price of the goods plus credit charges, delivery, insurance etc, less any cash deposit or trade in; and • the recipient takes possession of the goods, and has a right to use the goods, as well as an option to buy the goods, exercisable at or before the end of the hire period. 190A. The GST law recognises that a hire purchase agreement involves both the supply and acquisition of goods and the supply and acquisition of credit. 191. Agreements for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid are within the income tax definition of a hire purchase agreement. The GST Act applies in the same way, for attribution purposes, to supplies and acquisitions made under these agreements as it does to supplies and acquisitions made under hire purchase agreements. 192. Where a supply of goods is made for a period or on a progressive basis and the consideration is also provided on a progressive or periodic basis, the GST payable on that taxable supply is attributable in accordance with the basic attribution rule in section 29-5 as if each periodic or progressive component of the supply were a separate supply. 193. Likewise, the input tax credit that arises on a creditable acquisition to which Division 156 applies is attributable in accordance with the basic attribution rule in section 29-10 as if each periodic or progressive component of the acquisition were a separate acquisition. 193A. Section 156-23 provides that, for the purposes of Division 156, a supply or acquisition of goods or credit under a hire purchase agreement entered into on or after 2 July 2012 is treated as not being a supply or acquisition made on a progressive or periodic basis. 193B. Paragraph 5.38 of the relevant Explanatory Memorandum confirms that section 156-23 was intended to clarify the then existing treatment of goods acquired under a hire purchase agreement (rather than produce a different outcome). 194. The Commissioner's view is that Division 156 does not apply to a supply or acquisition of goods under a hire purchase agreement entered into before 2 July 2012. This is because: (a) the supply or acquisition of goods under a hire purchase agreement is not a supply or acquisition for a period or on a progressive basis and so does not fall within section 156-5 or section 156-10; and (b) a hire purchase agreement is not similar to a lease or hire arrangement and so does not fall within section 156-22. 195. The essential nature of a hire purchase agreement was discussed by Finnemore J in Warman v . Southern Counties Car Finance Corporation Ltd W J Ameris Car Sales [1949] 2 KB 576 . His Honour outlined at page 582 of his judgement, 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 ) Now, I think it might well be right to say if at any stage the option to purchase goes, the whole value of the agreement to the hirer has gone with it. If he wanted to make an agreement merely to hire a car he would make it, but he enters into a hire-purchase agreement because he wants to have the right to purchase the car; that is the whole basis of the agreement, the very foundation of it.' 196. This statement by Finnemore J recognises two basic ingredients of a hire purchase agreement, namely, the paramount purpose of purchasing and the financing element of the hire purchase (purchasing by deferred payments). 197. Looked at as a whole, 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. 198. 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. 199. Further, when the legal nature of the hire purchase arrangement involves bailment and an option to purchase, there is not a supply of goods for a period or progressively because it is not intended by the parties that the goods in question will be returned to the original owner, but will remain with the hirer who, when the option is exercised, is able to deal freely with the goods. 200. For these reasons, a supply of goods by way of hire purchase is not a supply for a period or on a progressive basis in the same way that a supply of goods by way of sale is not a supply for a period. 201. [Omitted.] 202. Further, the Explanatory Memorandum that accompanied the A New Tax System (Indirect Tax and Consequential Amendments) Bill 1999 stated that: 'Liability for GST under a hire purchase agreement will arise at the commencement of the agreement and not continuously throughout the period of the agreement. If a hire purchase agreement is entered into prior to 1 July 2000 it will not be subject to GST'. 203. This result could only be achieved if a supply of goods under a hire purchase agreement is not a supply of goods for a period or on a progressive basis. Paragraph 191 of GSTR 2000/29 relies on the income tax legislation definition of hire purchase agreement. Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines hire purchase agreement. It states: A hire purchase agreement means: (a) a contract for the purchase of goods where (i) the hirer has the right, obligation or contingent obligation to buy the goods; and (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. Goods and Services Tax Ruling GSTR 2000/35 also sets out the view that a supply of goods by way of hire purchase is not a supply for a period or on a progressive basis. A finance lease has the features set out in paragraphs 190 and 199 of GSTR 2000/29 and the essential features of a hire purchase agreement set out in paragraph 195 of GSTR 2000/29 and the features set out in paragraph (a) of the definition of hire purchase agreement in section 995-1 of the ITAA 1997. You have entered into a finance lease arrangement. You have entered into an agreement to rent a particular chattel for a certain length of time and you have the option to obtain title (you can obtain title at any time) Therefore, the two essential features of a hire purchase agreement as set out in paragraph 195 of GSTR 2000/29 are present in your case. Hence, the arrangement you have entered into is a hire purchase arrangement. Therefore, the supply of the goods to you is not a periodic or progressive supply. Hence, as you received the tax invoice, and paid the first instalment, in a certain month you were entitled to claim the full input tax credit in your BAS for the (particular tax period quarter). Alternatively, you can claim it in your BAS for the (particular tax period quarter) or your BAS for the (particular tax period quarter). In accordance with section 29-25 of the GST Act, the Australian Taxation Office (ATO) has the power to create special input tax credit attribution rules in cases where an acquisition occurs before the recipient knows the total consideration. The ATO has determined a special rule for such situations, which is set out in paragraphs 166 and 96A of GSTR 2000/29. Paragraph 166 of GSTR 2000/29 states: 166. However, when you know the total consideration for the acquisition, any input tax credit that has not been previously attributed to an earlier tax period is attributable to the tax period in which you first know the total consideration for the acquisition. Paragraph 96A of GSTR 2000/29 states: 96A. When the total amount of the consideration is known, a further tax invoice would be required by the recipient to attribute the input tax credit in relation to the remainder of the consideration. However, the determination will apply such that a tax invoice is not required where the recipient holds a further document that otherwise satisfies the requirements of subsection 29-70(1), except that it shows the remainder of the consideration payable rather than the total price. At this stage, you do not know what the Payout Amount will be. In accordance with paragraph 166 of GSTR 2000/29, if you acquire title at the end of the agreed lease term, you would attribute your input tax credit on the Payout Amount (if any) to the tax period quarter in which you know what the Payout Amount is. However, you must hold a tax invoice that states the Payout Amount when you lodge the BAS for that quarter.