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 attract 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 again raised this issue with the Government as this negative lessee sentiment extended beyond the transitional GST period, as leasing contracts have 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 in to reflect all 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 in this regard.
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).
In between these two ends of the spectrum, a hire purchase transaction may have both a taxable and a financial supply component. To the extent that the consideration is referable to the sale of the asset, this component of a hire purchase is a taxable supply. The financier is liable for GST on this component, and is entitled to input tax credits for GST costs referable to the supply of the asset. The provision of credit under a hire purchase agreement is a financial supply, and therefore input-taxed, where the credit is provided for by way of a separate charge and the separate charge is disclosed to the customer.
Accordingly there are two types of hire purchase agreements for GST purposes. Under agreements where no separate credit charge is disclosed to the customer, the hire purchase will be 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. By contrast, under agreements where a separate credit charge is disclosed there will be two types of supplies: a financial supply and a taxable supply. The liability for GST on the taxable supply arises at the commencement of the agreement and not continually throughout the period of the agreement. There is no liability for GST on the financial supply component of that hire purchase; the GST cost incurred by the financier in acquiring the equipment is recoverable as being referable to the onward supply of the equipment by way of the hire purchase. However, GST costs incurred by the financier in respect of other operating costs are unlikely to be fully recoverable, as they will be partly referable to the provision of credit, which is an input-taxed 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, one which is causing concern is the treatment of cash basis taxpayers under hire purchase arrangements. AELA has 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.
In August 2004 AELA made further submissions to Treasury on this issue, providing analysis which concluded that the present treatment did not provide a neutral and efficient taxation outcome, and an international comparison which highlighted that comparable GST/VAT jurisdictions have introduced special rules to ensure that a cash basis taxpayer under a hire purchase agreement can claim input tax credits upfront. This issue was a major feature of AELA’s submission to the 2008 Board of Taxation’s GST Review.
Also in the GST area, the Tax Office released a Ruling (GSTR 2003/11) on early termination of leases, which addressed the main issues raised by AELA. Any payment received to compensate the lessor for genuine damages flowing from early termination as a result of default by the lessee is not consideration for a supply, and no GST liability attaches to this payment. Similarly, no GST liability attaches to a payment relating to a casualty event. The Ruling also confirmed that an amount payable on late payment of lease instalments is a financial supply, hence input-taxed and no GST applies.
In early 2006, the Tax Office issued three Interpretative Decisions (IDs) in relation to the GST consequences when a hirer defaults under a hire purchase and the financier exercises its right to terminate the agreement. Importantly, these IDs confirm that the financier is entitled to a GST decreasing adjustment when it exercises its right to terminate the agreement, and that the termination amount is a payment in respect of damages and does not attract a GST liability.
The issue of GST hire purchase apportionment has been the subject of ongoing consultation between the Tax Office and AELA since early 2000; it relates to the appropriate methodology to apply to a financier’s overheads such as brokerage, rent, electricity, etc, as a basis for determining the financier’s entitlements to input tax credits. In January 2008 the Tax Office issued Law Practice Statement (PS LA 2008/1), outlining acceptable methods for calculating input tax credits for acquisitions related to supplies made under a disclosed hire purchase agreement. For a tax period up to 1 April 2008, an ‘acceptable’ revenue based formula can be applied, but after that period the Tax Office will accept as fair and reasonable a method that provides a recovery of less than or equal to 15%. Taxpayers were encouraged to seek a GST private ruling if they wish to apply a higher percentage.
In response, AELA advised the Tax Office that while the Practice Statement had enabled members to proceed with certainty, our long-standing concerns remained. Our view remains that the ‘15% approach’ should be regarded only as one which the Commissioner regards as complying with the law, and AELA does not consider a 15% recovery rate to be at the top end of the range of what is likely to be a fair reflection of the apportionment required by the law. AELA has suggested that the percentage of total to taxable supplies under a disclosed hire purchase is an alternative methodology which is fair and reasonable.
In response to the release of the GST Ruling on securitisation (GSTR 2004/4), AELA made further representations to the Tax Office on the issue of ‘servicer services’. AELA submitted that allowing a reduced input tax credit for only some components of servicer services would not be consistent with the policy intent of the reduced credit acquisitions policy regime, or the legislative provisions of the GST Act. AELA requested that the Tax Office not issue assessments based on the ruling until the review of this issue has been completed. This matter is still under consideration by the Tax Office.
With the release of the three Interpretative Decisions on hire purchase default terminations noted above, AELA provided members with an operational overview of: making decreasing adjustments for GST and luxury car tax that arise on default terminations; GST on the recovery of ‘shortfall’ amounts in respect of default lease terminations; and also reduced input tax credits in respect of service fees charged to securitisation vehicles. This guidance outlined the methods acceptable to the Tax Office for determining GST liability and for calculating adjustments. With the finalisation of the Tax Office Practice Statements on hire purchase apportionments, in July 2008 AELA provided guidance on the adjustments available to members.
Following GST reforms in New Zealand, AELA has been giving consideration to similar initiatives in the Australian context. The basic design of GST is that it is a tax on private consumption. To ensure GST is effectively borne by consumers, and to prevent cascading, suppliers are generally entitled to an input tax credit (ITC) for the GST component of their acquisitions. However, financial supplies are input-taxed, and there is no entitlement to ITCs (apart from reduced ITCs, where available). When Australia introduced GST, the Government noted that this treatment of financial services was consistent with the international model. But from 1 January 2005 New Zealand introduced ‘zero rating’ of business-to-business (B2B) financial services. This approach integrates the supply of financial services more fully into the GST system by taxing (at 0%) such supplies and allowing financial service providers to claim ITCs. AELA members believe these developments merit consideration of such reform in Australia.
In June 2008 the Government requested the Board of Taxation to review the legal framework for the administration of GST. The review does 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 efficiencies 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. Although outside scope, AELA suggested that the Board may see merit in recommending consideration be given to zero-rating of financial services.
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