GST and attribution of input tax credits for an acquisition under a hire purchase agreement where the recipient accounts for GST on a cash basis

Can an entity, that accounts for goods and services tax (GST) on a cash basis, attribute all of the input tax credit to the tax period in which it makes its first instalment payment under subsection 29-10(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when: • it purchases equipment under a hire purchase agreement, and • the supplier includes an amount for the full GST payable as part of the first instalment?

No, an entity that accounts for GST on a cash basis cannot attribute all of the input tax credit to the tax period in which it makes its first instalment payment under subsection 29-10(2) of the GST Act.

The entity attributes the input tax credit for the acquisition to the tax periods in which it provides consideration for the acquisition, but only to the extent that it provides consideration in those tax periods.

The entity is a business operator that accounts for GST on a cash basis. The entity purchased equipment for its business under a hire purchase agreement.

This acquisition was a creditable acquisition under section 11-5 of the GST Act. The entity makes the first instalment payment under the hire purchase agreement in the current tax period.

The first instalment was calculated by the supplier as the sum of: • part of the principal, • interest on the principal, and • an amount equal to the entire GST payable by the supplier for the supply.

The supplier calculated the first instalment to include an amount equal to its GST liability as it accounts for GST on a non-cash basis and is required to attribute the entire GST payable on its supply to the tax period in which it received the first instalment from the entity (paragraph 29-5(1)(a) of the GST Act).

Subsection 29-10(2) of the GST Act sets out the input tax credit attribution requirements for an entity that accounts for GST on a cash basis. Paragraph 29-10(2)(b) of the GST Act states: if, in a tax period, you provide part of the consideration - the input tax credit for the acquisition is attributable to that tax period, but only to the extent that the consideration is provided in that tax period.

Paragraph 208 of Goods and Services Tax Ruling GSTR 2000/29 provides that the application of the basic attribution rules to supplies and acquisitions under hire purchase agreements is the same as for a supply or acquisition of goods under an ordinary sale agreement.

In relation to acquisitions, paragraph 212 of GSTR 2000/29 states: If you account for GST on a cash basis and you make a creditable acquisition of goods under a hire purchase agreement, you attribute input tax credits for the acquisition to the tax periods in which you provide consideration for the acquisition, but only to the extent that you provide consideration in those tax periods.

The entity accounts for GST on a cash basis and makes the first instalment payment under the hire purchase agreement in the current tax period. Therefore, in this current tax period the entity is entitled to attribute input tax credits for the acquisition to the extent that it has provided consideration for that acquisition in this tax period. This is calculated as: 1/11 * (instalment for that period - interest component of instalment) (The interest component of the instalment is input taxed and, therefore, there is no input tax credit entitlement on that part of the payment.)

From the entity's perspective, it is irrelevant that the supplier included an amount that was equal to its entire GST liability in calculating the amount of the first instalment. The supplier calculated the first instalment to include an amount equal to its GST liability because it accounts for GST on a non-cash basis and is required to attribute the entire GST payable on its supply to the tax period in which it received the first instalment from the entity (paragraph 29-5(1)(a) of the GST Act).

This ensures that the supplier would receive sufficient money from the instalment to meet its GST obligations. However, from the entity's point of view, each instalment represents part of the price of the equipment financed under the hire purchase agreement.

This is supported by the Administrative Appeals Tribunal (sitting as the Small Taxation Claims Tribunal) decision in Re Lancut (Aust) Pty Ltd v. FC of T 2003 ATC 2204; (2003) 54 ATR 1027, where the taxpayer entered into a financing arrangement to acquire a motor vehicle. Under the arrangement, which was in substance a sale by instalments, the taxpayer paid a portion of the purchase price for the motor vehicle upfront and: • the title in the goods did not pass until the last instalment of the hire purchase agreement was made, • the taxpayer accounted on a cash basis, and • the financier accounted on an accruals basis.

The tribunal held that paragraph 29-10(2)(b) of the GST Act applied to limit the amount of the input tax credit that could be claimed as only part of the consideration for the sale was paid during the relevant tax period.

Therefore, under subsection 29-10(2) of the GST Act, the entity cannot attribute the entire input tax credit for its acquisition of equipment under a hire purchase agreement to the tax period in which it makes the first instalment.

The entity attributes the input tax credit for the acquisition to the tax periods in which it provides consideration for the acquisition, but only to the extent that it provides consideration in those tax periods.