16 Aug 2012
GST Changes to Hire Purchase Agreements
If you are a supplier under a hire purchase agreement, you will need to make sure that your documents allow for the new treatment of GST in relation to hire purchase arrangements that took effect from 1 July 2012.
Previously, the hirer only had to pay GST on the term charges under a hire purchase agreement if the supplier did not separately identify and disclose the term charges to the hirer. Now, for hire purchase agreements entered into from 1 July 2012, the hirer will need to pay GST on the term charges regardless of whether or not the term charges have been separately identified and disclosed. Further, the hirer will also need to pay GST on all other associated fees and charges, such as late payment fees.
The way that GST is accounted for under hire purchase agreements has also changed. Hire purchase agreements are now no longer treated as supplies made on a progressive or periodic basis - instead they are treated as a stand-alone supply in the relevant tax period. Further, hirers who account for GST on a cash basis will now be treated as accounting for GST on an accruals basis. This essentially means that:
(a) if you are the hirer, you can claim any input tax credits you are entitled to upfront instead of waiting until each instalment is paid;
(b) if you are the supplier, you will need to remit to the ATO all the GST on the terms charges upfront. You will either need to collect all the GST payable under the hire purchase agreement upfront from the hirer or agree to have the GST component included in the amount financed.
One important factor to note is that the GST changes will not affect hire purchase agreements entered into before 1 July 2012, unless those agreements are amended in such a way that a new agreement is created.
What should you do?
If you are the supplier, you should make sure that your hire purchase documents are reviewed and updated if necessary to account for the changed treatment of GST.
Both hirers and suppliers will also need to ensure that their systems have been updated to account for the changes.
For assistance, please feel free to contact us.
This article was written by Jennifer Zhou, Lawyer - Commercial Team.