Goods and Services Tax
In September 1997 the Government announced the establishment of a Task Force on Taxation, commencing a process, which has delivered one of the most pervasive tax reform initiatives in Australia’s history. The GST legislation was introduced into the Parliament on 2 December 1998 and commenced operation on 1 July 2000. AELA was closely involved with its members in preparing for GST. In the early stages this activity focused on representations to the Government concerning the transitional provisions; AELA suggested that special transitional arrangements should apply so that goods acquired in the wholesale sales tax regime should not be subject to GST in addition to wholesale sales tax already borne. AELA was very appreciative of the final rules to apply to hire purchase agreements in this regard, that is, there were no GST consequences for hire purchase contracts entered into prior to 1 July 2000.
Following extensive AELA representations, partial relief was also provided for operating leases entered into prior to 2 December 1998. However, the outcome in relation to those remaining leases of equipment, which had already borne sales tax and subsequently attracted GST on rentals and on sales at lease end, resulted in significant lessee concern. In many of these cases the recipients of the supply were entitled to input tax credits, but nevertheless they were concerned about the perception of double tax. The major hardship occurred where the recipient was not entitled to full input tax credits. AELA continued to raise this issue with the Government, as this negative lessee sentiment extended beyond the transitional GST period, with leasing contracts having a typical life of 3-4 years. AELA requested that the Government give further consideration to ameliorating this impact, particularly where the recipient was not entitled to input tax credits, however this relief was not forthcoming.
Following the release of the legislation in December 1998, AELA worked in conjunction with a major accounting firm to prepare a comprehensive GST Guide for members, which was subsequently updated to reflect interim changes, and to take account of the ATO public rulings relevant to our members, and also the specific private rulings provided to AELA.
AELA worked closely with the Tax Office in preparing for the introduction of GST. This process clarified a significant number of issues for members, as AELA obtained private rulings, which cover the GST consequences of the crucial operational issues dealt with by financiers on a day-to-day basis. AELA and members were particularly appreciative of the assistance provided by the Tax Office during this time.
The GST treatment of the leasing and equipment finance facilities provided by AELA members traverses the full GST spectrum. At one end, chattel mortgages are treated as a financial supply; such transactions are accordingly input-taxed, no GST is payable on the provision of the loan or the repayment of the interest and principal, but the financier is unable to claim input tax credits for GST incurred on costs related to the provision of the loan (subject to the operation of the Reduced Input Tax Credit (RITC) rules). When the customer uses the loan funds to purchase the item of property, GST may well be payable by the customer on the acquisition of the property. Input tax credits may be claimable by the customer, provided they are entitled to a credit.
At the other end of the GST spectrum, both finance and operating leases are taxable supplies; lease rentals incorporate a GST component, but in most cases the business lessee will be entitled to an input tax credit for this component. When the lessor purchases the equipment, the purchase price will be GST-inclusive. However, the lessor should be entitled to a full input tax credit for both the GST cost incurred in acquiring the equipment and other operating expenses (subject to any specific input tax credit rules, such as the phasing-in of input tax credits which applied for motor vehicles).
Under the initial GST arrangements, a hire purchase transaction may have had both a taxable and a financial supply component. To the extent that the consideration was referable to the sale of the asset, that component of a hire purchase was a taxable supply. The financier was liable for GST on this component, and entitled to input tax credits for GST costs referable to the supply of the asset. The provision of credit under a hire purchase agreement was a financial supply, and therefore input-taxed, where the credit was provided for by way of a separate charge and the separate charge is disclosed to the customer.
Accordingly there were two types of hire purchase agreements for GST purposes, but as from 1 July 2012 all hire purchase agreements are treated the same. Hire purchase is treated as a taxable supply. That is, the financier is liable for GST on all charges under the agreement, and will be entitled to input tax credits in relation to all acquisitions required to make that supply.
AELA continues to work with the Tax Office in relation to issues that arise. Whilst such issues have generally been resolved in a satisfactory manner, the one which caused ongoing concern was the treatment of cash basis taxpayers under hire purchase arrangements. AELA put the view that hirers who account for GST on a cash basis should be entitled to claim input tax credits in the tax period in which the GST liability arises under the hire purchase agreement. Where the financier is an accrual basis taxpayer, as in virtually all cases, a cash basis hirer should be entitled to an input tax credit at the commencement of the hire purchase agreement. The arrangements applying from 1 July 2012 achieve this outcome; the paragraphs below provide background to this issue.
In June 2008 the Government requested the Board of Taxation to review the legal framework for the administration of GST. The review did not extend to the rate of GST or the scope and extent of what goods and services are subject to GST. The principal issue raised in AELA’s submission was the need to rectify the distortion to the equipment finance market resulting from the GST treatment of cash basis taxpayers under hire purchase arrangements. Recommendations were also made on a wide range of other issues to enhance the efficiency and equity of GST administration. AELA also suggested an annual report on overseas GST initiatives, and the need for a follow-up review in three years. Disappointingly, this Review did not recommend that the hire purchase cash basis taxpayer anomaly be addressed.
Over the years AELA made multiple submissions on this issue. Accordingly we were pleased that the Government as part of the 2010 Budget, in responding to Treasury’s Review of the Financial Supply Provisions, announced two significant measures in relation to hire purchase. Firstly, the attribution rules for hire purchase would be made the same for both cash and non-cash GST payers; cash basis taxpayers would be able to claim input tax credits upfront, thus removing the GST anomaly distorting hire purchase. Secondly, the distinction between ‘disclosed’ and ‘non-disclosed’ hire purchase would be removed, and the whole supply would be treated as fully taxable; amongst other things, this would also resolve the hire purchase apportionment issue. As noted, these measures took effect from 1 July 2012.
AFC responded to the Treasury Discussion Paper on these reforms, conveying our support for the amendments to make hire purchase fully taxable and allowing full input tax credits upfront for businesses accounting on a cash basis where they enter into hire purchase. In response to the specific issues raised by Treasury, AELA noted that hire purchase is not used in consumer finance and consumers would not be adversely affected by the changes to make hire purchase fully taxable.