Changes To GST Commercial HP
Two significant changes have been made to the GST treatment of supplies under hire purchase agreements, to come into force on 1 July 2012.
Historically, whether an entity could claim all of the GST upfront on an item purchased under a hire purchase contract depended on whether the entity accounted for GST on a cash or accruals basis.
From the 1st July 2012, the draft legislation removes this distinction. That is, entities who account for GST on a cash basis will be able to claim GST up front when purchasing assets through hire purchase arrangements.
Secondly, the existing distinction between payments of the principal purchase price, on the one hand, and credit charges, including interest and associated fees such as establishment fees, on the other hand, is abolished.
While previously GST was only payable on the purchase price of the vehicle or asset, as of the 1 July 2012, GST will be payable on the purchase price of the asset or vehicle, all term charges (interest), and any fees.
For businesses who are registered for GST, the extra GST charged can then be claimed back as Input Tax Credit progressively over the life of the loan.
This will only apply to hire purchase contracts entered into after 1 July 2012.
These changes are best described by using an example:
Beverley operates a business and is registered for GST. On the 23 August 2012, Beverly contracts to purchase a new vehicle worth $33,000 (including GST). Beverly also contracts with MV Finance Co to provide the credit contract for the purchase of the vehicle. The credit contract includes terms charges (or total interest) of $4,400 (including GST).
Over the life of the contract, Beverly is liable to pay $37,400 ($33,000 + $4,400). Beverly is able to claim $3,000 in input tax credits in her BAS in the tax period in which she receives the invoice from the financier (whether on cash or accruals). The extra GST charged $400 can be claimed back over the life of the loan.
Examples of the changes to GST Commercial HP
This first worked example demonstrates the effect that the changes to GST will have on CHP agreement settled after 1 July 2012. It compares an example CHP agreement started prior to June 30 with the same agreement started after 1 July 2012:
As you can see, the newly-introduced GST on interest and fees has the effect of increasing monthly repayments by $23/month for a total life-of-loan difference of $1,380 (before taking into account any ITCs which may be claimed).
In our second worked example compare we a CHP agreement started before and after 1 July 2012 with to a Chattel Mortgage (the most common alternative to a CHP for businesses):
What alternative finance options exist?
For businesses (including companies, partnerships and sole traders)
Companies, partnerships, sole traders and other businesses who have historically financed vehicles and business equipment using on a CHP may wish to consider the other finance options available to them, such as a Chattel Mortgage or a Finance Lease (Car Lease):
A Chattel Mortgage is a finance option under which the financier advances funds to the customer in order to purchase a vehicle, and the customer takes ownership of the vehicle at the time of purchase.
Under a Chattel Mortgage the financier takes security over the vehicle or asset by registering a Security Interest on the PPSR. GST is paid on the purchase price of the vehicle, but is not charged on any lender fees, terms charges, the residual value or the monthly repayment.
The advantage for businesses is that all the GST paid (again, only chargeable on the purchase price of the vehicle) can be claimed back as soon as they lodge their next BAS.
A Chattel Mortgage is a popular alternative to the Commercial Hire Purchase. The amount of GST paid on a Chattel Mortgage remains unchanged after July 1 2012, and is equivalent to the GST that was payable on a Hire Purchase prior to 1 July 2012.
Finance Lease (Car Lease)
Under a Car Lease (or “Finance Lease”) the financier purchases the vehicle on behalf of the customer and leases the vehicle back to them over the period of the lease in return for monthly instalments.
At the end of the contract, the business can either choose to dispose of the vehicle, pay the residual and take ownership of the vehicle, or refinance the contract.
Any GST contained in the purchase price of the vehicle (up to the Depreciation Threshold) is claimed as an ITC by the financier, and the amount financed is reduced by an equivalent amount.
GST is charged on any fees, the monthly lease rental (including interest charges) and on the residual value on the loan. Businesses registered for GST are eligible to claim the GST paid as an Input Tax Credit progressively over the life of the lease.
For more information on small business asset finance, call Yvonne Ratcliffe at Central Coast Mortgage Brokers Pty Ltd on 4393 1945 for a no obligation free quote on Chattel Mortgage, Commercial Hire Purchase or Finance Lease options available.