GST and Hire Purchase Agreements 

Under GST, a hire purchase agreement is treated as a "taxable supply" on the commencement of the arrangement between the hirer and the financier (the National).

The calculation of the GST for a hire purchase arrangement differs on whether or not the hire purchase agreement documentation separately discloses the amount of interest or terms charges calculated on the amount financed.

With regard to GST and hire purchase agreements, there is deemed to be a sale of the equipment from the financier to the hirer, the GST liability arises at the commencement of the arrangement. Even though the total amount payable under the agreement will be paid by periodic instalments and ownership of the equipment will not pass to the hirer until the final repayment. The financier, being the supplier, is responsible for the payment of the GST liability.

The GST liability on the deemed sale is a cost to eZeHire, which can potentially impact the amount financed under the hire purchase arrangement.

For GST purposes a hire purchase arrangement is treated as a sale of the equipment on commencement of the arrangement to the hirer. Therefore, if the hire purchase arrangement was entered into on or before 30 June 2000, there is no GST payable in respect of this hire purchase arrangement. This applies even if actual repayments under the arrangement may continue to be paid after 1 July 2000.

Disclosed terms charges

In a hire purchase arrangement, where the interest or terms charges amount is separately disclosed, the terms charges constitutes a financial supply that does not attract GST. However, the capital cost of the equipment acquired is a taxable supply and therefore GST applies to the capital component of the hire purchase arrangement before taking into account the terms charges.

Hirers input tax credit

The hirer should be entitled to an input tax credit claim for the total GST amount on a hire purchase arrangement for an item of equipment that is to be used solely in conducting a business that is registered for GST purposes and makes taxable or GST-free supplies. For a motor vehicle that exceeds the luxury motor vehicle limit set by the Federal Government, the hirers input tax credit is limited to $5,012.18.

The timing of the input tax credit entitlement will depend on whether the hirer accounts for GST on a cash or non-cash (ie. accruals) basis.

If the hirer accounts for GST on an accrual basis, the hirer should be able to claim the full input tax credit for the tax period in which the hire purchase arrangement is entered into. However, the ATO have released a draft ruling that indicates that hirers who account for GST on a cash basis, are not entitled to claim the input tax credit up front, but rather over the period of the hire purchase arrangement as the cash repayments are made. For hirers who account for GST on a cash basis, a GST Input Taxed Equipment Loan such as rental finance or leasing may be a preferable alternative to hire purchase.

Financed GST cost

The National has identified the potential need to finance the GST cost on the deemed sale of the asset under a hire purchase arrangement and has established three possible options for a hirer. They are:

1. Hirer pays the amount equivalent to the GST with the first repayment at settlement of the hire purchase arrangement. This effectively means that the hirer is only financing the equipment value and not the GST cost under the hire purchase arrangement. Please note that this option is not available for clients who account for GST on a cash basis, as their input tax credit entitlement will arise over the period of the hire purchase as they make repayments. 
2. Hirer makes a special repayment when the hirer is to receive the benefit of claiming the input tax credit in respect of the hire purchase (ie when hirer lodges their GST return claiming the appropriate input tax credit). Please note that this option is not available for clients who account for GST on a cash basis, as their input tax credit entitlement will arise over the period of the hire purchase as they make repayments. 
3. The GST cost is amortised over hire purchase period, that is both equipment value and the GST cost is financed under the hire purchase arrangement