As of the 1st of July 2012, there are some important changes to the GST treatment of Commercial Hire Purchase (or Offer to Hire) contracts.
Currently, under an Offer to Hire contract, only the upfront sale of the asset to the customer by the financier is considered taxable. Term charges imposed on the amount financed and all related fees and charges are considered input tax, with no GST being levied.
From 1st July 2012, this distinction will be removed and all Offer to Hire contracts will be treated as fully taxable.
This means that term charges imposed on Offers to Hire including all fees and charges directly related to an Offer to Hire will be subjected to GST and payable upon settlement of the contract.
It should be noted that this new GST treatment is different to the GST treatment of a Lease agreement, where the GST is charged progressively on the rentals and residual.
In simple terms clients will be paying GST on the interest charged for the Hire Purchase term and this GST is payable at settlement. Of course, as long as you are registered for GST and the asset being purchased is for business use, then this GST will be claimed back as an input tax credit on the next BAS so the net effect is nil.
The other important change that comes into effect is that the GST can be claimed back immediately even for clients on Cash Accounting. Currently, if a client is on Cash Accounting, then the GST paid for an asset on Hire Purchase must be claimed progressively over the term of the HP in proportion to the principle reduction made with each payment – in other words, an accounting nightmare.
As of 1st July 2012, this changes and GST, including the new GST on terms charges can be claimed back immediately.
So, why use Hire Purchase instead of Chattel Mortgage when the tax and GST treatment are identical. One reason springs to mind:
• PPSR – General Security Agreements (previously known as Fixed and Floating charges)
PPSR:- a common issue we face is that banks will hold a General Security Agreement (GSA) over assets of a business as a way of securing any business lending. These are long term and all-encompassing security agreements lodged whenever a bank lends money to a client. The problem arises when a client enters into a finance agreement like a Chattel Mortgage with another lender. The new lender will need to have a written agreement from the other bank releasing the new asset from the GSA.
Sounds complicated – it is, and it’s a major factor in delaying finance.
Under a Hire Purchase, the new asset being purchased is actually invoiced to the finance company, not the client, bypassing the need to get formal releases from another bank.
At Austral Lending Solutions we are passionate about providing our clients with the best possible service and technical advice. We work closely with your accountant to ensure that your finance is structured correctly 100% of the time. If you’d like to discuss any aspects of this article with me please call me on 0403 439 502, or check out my new Linkedin profile at: http://au.linkedin.com/in/thefinanceguru
