GST and provision of a loan by a pawnbroker

Is the entity, a pawnbroker, making an input taxed financial supply under subsection 40-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it provides a loan to a customer that is secured by pawned goods and charges the customer a redemption fee for the recovery of those goods?

Yes, the entity is making an input taxed financial supply under subsection 40-5(1) of the GST Act when it provides a loan to a customer that is secured by pawned goods and charges the customer a redemption fee for the recovery of those goods.

The entity is a pawnbroker. The entity provides a loan to a customer that is secured by pawned goods. To recover the goods, the customer must pay a 'redemption fee'. The redemption fee is the amount of the loan (the principal) plus interest on that loan.

The entity's transaction is connected with Australia and the entity is registered for goods and services tax (GST).

Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act defines a financial supply as having the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Subregulation 40-5.09(1) of the GST Regulations, provides that a supply is a financial supply if it is the provision, acquisition or disposal of an interest mentioned in subregulation (3) or (4) and: a) the provision, acquisition or disposal is: • for consideration, • in the course or furtherance of an enterprise,and • connected with Australia. b) the supplier is: • registered or required to be registered for GST, and • a financial supply provider in relation to the supply of the interest.

Item 2 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 2) lists 'a debt, credit arrangement or right to credit, including a letter of credit'. Under item 1 in Part 2 of Schedule 7 to the GST Regulations, borrowing and lending, including establishing, maintaining and discharging loans are examples of financial supplies that are covered by Item 2. The entity is supplying a loan to its customer that is secured by pawned goods. This supply is the provision of an interest in a credit arrangement and is covered by Item 2.

Paragraph 40-5.09(1)(a) of the GST Regulations requires that the supply is for consideration, is in the course of the entity's enterprise and is connected with Australia.

When a customer borrows money from the entity on terms that include payment of interest, it creates an interest in a debt that includes the payment of interest. To reclaim the pawned goods the customer must pay a redemption fee. This fee is made up of the principal and an interest component. The interest in a debt and interest component of the redemption fee are the consideration for the supply of the loan. The entity is a pawnbroker and as such, the provision of a loan that is secured by pawned goods is in the course or furtherance of its enterprise. In addition, the transaction is connected with Australia. Therefore, the requirements of paragraph 40-5.09(1)(a) of the GST Regulations are met.

Paragraph 40-5.09(1)(b) of the GST Regulations requires that the entity is registered for GST and is a financial supply provider in relation to the supply of the interest. The entity is registered for GST. Subregulation 40-5.06(1) of the GST Regulations provides that an entity, in relation to the supply of an interest that was: • immediately before the supply, the property of the entity; or • created by the entity in making the supply;

is the financial supply provider of the interest.

The entity, in providing a loan to its customer, has created the interest in the credit arrangement. Therefore, it is the financial supply provider in relation to the supply of the loan and the requirements in paragraph 40-5.09(1)(b) of the GST Regulations are satisfied.

As all the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied, the supply of the loan is a financial supply. Therefore, the entity is making an input taxed financial supply under subsection 40-5(1) of the GST Act when it provides a loan to a customer that is secured by pawned goods and charges the customer a fee for the recovery of those goods.