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Business Tax Tips – Hire Purchase and how GST applies

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Business Tax Tips – Hire Purchase and how GST applies

Hire Purchase and how GST applies

Businesses can acquire assets such as equipment by entering into hire purchase or leasing agreements to pay for and use goods over a period of time rather than paying the full cost up front. Then they need to know how GST applies. Here is some information from the ATO website to assist, including links for further information –

How does hire purchase work?

Under a hire purchase agreement, you:

  • Purchase goods through instalment payments
  • Use the goods while paying for them
  • Do not own the goods until you have paid the final instalment.

Do you pay GST on hire purchases?

For a hire purchase agreement entered into before 1 July 2012

Where the supply of goods to you under a hire purchase agreement is a taxable supply, the price you pay for the goods includes GST. If you use the goods in your business, you may be able to claim a GST credit for any GST included in the purchase price of the goods.

If the supplier:

  • Separately identifies and discloses the interest charge to you, you do not have to pay GST on the interest as it is for a financial supply
  • Does not separately identify and disclose the interest charge to you, you must pay GST on the total amount payable under the contract.

The interest charge is ‘disclosed’ to you if the supplier tells you any of the following in the hire purchase agreement:

  • The dollar amount of the credit charge
  • The interest rate
  • The formula or formulas used to work out the credit charge amount
  • Any other information enough to work out the credit charge amount.

For a hire purchase agreement entered into on or after 1 July 2012

All components of the supply made under a hire purchase agreement entered into on or after 1 July 2012 are taxable regardless of whether the credit component is separately disclosed. Any associated fees and charges, such as late payment fees incurred under the terms of the hire purchase arrangement, will also be subject to GST.

A change to an existing hire purchase agreement entered into before 1 July 2012 that does not result in a new agreement is not affected by the new rules. That is, the supply of a separately disclosed credit component will continue to be an input taxed financial supply.

Hire purchase agreement not treated as a progressive or periodic supply

Do not treat a hire purchase agreement as a sale or purchase you make on a progressive or periodic basis. Treat a hire purchase agreement as a stand-alone sale or purchase in a tax period – so, the same rules apply as they would for any sale and purchase of goods under an ordinary sale agreement.

How do you claim GST credits on hire purchases?

If you account for GST on a non-cash (accruals) basis

You can claim the full GST credit on your hire purchase agreement in the tax periods when either:

  • You make your first payment
  • If before making your first payment, a tax invoice is issued to you.

If you account for GST on a cash basis

For hire purchase agreements entered into before 1 July 2012 you may claim one-eleventh of the principal component of each instalment in the period you pay it. If the supplier provides regular accounts or statements that show the principal and interest components for each instalment, you must use that information to work out GST credits in the relevant tax period. If you do not know the principal component for each instalment, you need to take reasonable steps to find out from the supplier.

For hire purchase agreements entered into on or after 1 July 2012, you may claim input tax credits upfront instead of waiting until each instalment is paid, in the same way as you would if you accounted for GST on a non cash basis. As mentioned above, all components of the supply made under a hire purchase agreement entered into on or after 1 July 2012 will be subject to GST. You may claim one-eleventh of all components, including the credit component and any associated fees and charges which have been subject to GST under the agreement.

See some working examples further down the page at the ATO site HERE

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Email info@accountkeepingplus.com.au or call 0407 361 596 Australia

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Author: accountkeepingplus

Administration, bookkeeping and compliance for small business, Training, trouble-shooting, or we can do the books and payroll for you! Self Managed Superannuation Fund Service Provider, free support MYOB Certified Consultant, Reckon/QuickBooks Professional Partner.

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