Issue
Can the entity, a supplier of a hire purchase agreement, calculate the adjustment for bad debts owing under a hire purchase agreement in accordance with the special rules for bad debts relating to partly taxable supplies under Subdivision 136-A of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?
Decision
No, the entity can not calculate the adjustments for bad debts owing under a hire purchase agreement in accordance with the special rules for bad debts under Subdivision 136-A of the GST Act.
The hire purchase agreement is not a single supply that is partly taxable. The hire purchase agreement consists of a taxable supply and a financial supply.
Facts
The entity enters into hire purchase agreements with customers for the supply of goods. Under the hire purchase agreement the entity makes two supplies, a taxable supply of goods and a financial supply represented by the disclosed credit charges. Payments for these supplies are made to the entity in instalments, consisting of a taxable and input taxed component.
The entity is registered for goods and services tax (GST). The entity does not account for GST on a cash basis and attributes the GST on the supply of the goods under the hire purchase agreement in the tax period of the supply.
The GST payable on the taxable supply is equal to 1/11th of the price of the taxable supply.
In a later tax period, there is a genuine dispute between the parties, the hirer defaults and the entity exercises its right to terminate the hire purchase agreement. Amounts in arrears up to the date of termination remain payable. The requirements in section 21-5 of the GST Act are met and the entity is entitled to a bad debt adjustment.
These events are illustrated in the following diagram. This ATO Interpretative Decision addresses event (2):
Reasons for Decision
The requirements to establish a bad debt and calculate the adjustment required are contained in Division 21 of the GST Act. Item 1A in the table in section 21-99 of the GST Act (Item 1A) provides special rules in relation to bad debt adjustments for partly taxable supplies. If a bad debt is established under Division 21 of the GST Act and it relates to a partly taxable supply the adjustment for the bad debt will be calculated under Subdivision 136-A of the GST Act.
A hire purchase agreement is not a single supply that is partly taxable. Instead, the hire purchase agreement consists of two separate supplies. There is a taxable supply of goods and a second supply of the interest component, which is a financial supply under regulation 40-5.09 of the A New Tax System (Goods and Services Tax) Regulations 1999.
Therefore, as the hire purchase agreement is not a partly taxable supply Item 1A will not apply and the adjustment for the bad debt will not be calculated under Subdivision 136-A of the GST Act. Note: 1. Refer to Goods and Service Tax Ruling GSTR 2000/2 for details on calculating a bad debt adjustment under Division 21 of the GST Act. 2. If the GST payable on the taxable supply had been less than 1/11th of the price of the taxable supply then Subdivision 136-B of the GST Act may apply.