GST and 'credit under a hire purchase agreement' entered into on or after 1 July 2012 (two financiers)

Is an amount financed under a hire purchase agreement entered into on or after 1 July 2012, to discharge a debt incurred under a separate hire purchase agreement entered into with another financier at an earlier point in time 'credit under a hire purchase agreement' under item 20 in the table in regulation 40-5.12 of the A New Tax System (Goods and Services Tax) Regulations (GST Regulations)?

Yes, the amount financed is 'credit under a hire purchase agreement' under item 20 of the table in regulation 40-5.12 of the GST Regulations.

An entity has had the use of an asset (old asset) under a hire purchase agreement entered into on or after 1 July 2012 (earlier hire purchase agreement). The amount owing on this asset is $20,000 (the debt).

The entity intends to trade-in the old asset for another asset (new asset) which is also financed through hire purchase under a new hire purchase agreement (later hire purchase agreement).

The trade-in amount of the old asset is $14,000.

The debt of $20,000 is therefore greater than the trade-in amount for the old asset. The difference of $6,000 between the debt and the trade-in amount is referred to as 'negative equity' or 'minus equity' (negative equity).

The entity enters into the later hire purchase agreement with another financier (later financier) to finance the new asset and discharge the debt owing.

Under the later hire purchase agreement the amount financed is made up of: • the price of the new asset, including goods and services tax (GST); • the amount to extinguish the debt under the earlier hire purchase agreement net of the trade-in amount (that is, the negative equity); and • other amounts in relation to the acquisition of the new asset (registration, compulsory third party insurance and stamp duty).

The entity and the financier of the earlier hire purchase agreement (earlier financier) agree that the earlier hire purchase agreement will be completed ('settled') by: • an undertaking from the entity and the dealer that the trade-in amount of $14,000 will be paid to the earlier financier; and • an undertaking from the later financier to pay the $6,000 negative equity to the earlier financier.

The entity acquires title to the old asset and trades it in on the new asset with a dealer. The dealer purchases the old asset from the entity for the trade-in amount.

In accordance with the undertaking, the dealer pays the trade-in amount to the earlier financier.

Under the later hire purchase agreement the later financier pays the dealer for the new asset, GST and other amounts.

The later financier acquires the new asset and gives the entity possession of it.

Subsection 40-5(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a financial supply has the meaning given by the GST Regulations. Subregulations 40-5.09(1) and (3) of the GST Regulations define what is a financial supply. A supply of something mentioned in an item set out in the table in regulation 40-5.12 of the GST Regulations is not a financial supply. [1]

Under item 2 in the table in subregulation 40-5.09(3) of the GST Regulations the provision, acquisition or disposal of an interest in or under a debt, credit arrangement or right to credit, including a letter of credit, is a financial supply where the further requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied.

However, under item 20 in the table in regulation 40-5.12 of the GST Regulations the supply of, or an interest in or under credit under a hire purchase agreement entered into on or after 1 July 2012 is not a financial supply.

The term 'credit' is not defined in the GST Act or the GST Regulations.

The ordinary meaning of credit includes 'any deposit or sum against which one may draw'. [2] This is consistent with what occurs to finance a new asset under the later hire purchase agreement and discharge the debt on the old asset incurred under the earlier hire purchase agreement. Under the later hire purchase agreement a 'sum' is made available by the financier to the entity. While the sum is not physically provided to the entity, it is used or drawn against to pay for the new asset and other associated liabilities financed and to discharge the debt on the old asset.

Credit also may involve deferred payment or repayment. The term 'credit arrangement', although not defined in the GST Act or GST Regulations is described in Schedule 1 of the GSTR 2002/2 as: An arrangement under which an entity lends money on terms that include deferred repayment, or under which payment of a debt owed by one entity to another is deferred or time is allowed to pay. [3]

There are deferred payments under a hire purchase agreement as the entity is required to pay the amount financed by instalments to the financier.

The Federal Court considered the meaning of 'credit arrangement' in item 2 of subregulation 40-5.09(3) of the GST Regulations in Commissioner of Taxation v. American Express Wholesale Currency Services Pty Ltd . [4] The majority cited with approval the comments of Justice Stone in Fitz-Gibbon v. Inspector General in Bankruptcy ( Fitz-Gibbon ): [b]roadly speaking, the term ['credit'] means the provision of funds either directly to the person obtaining the credit or to a third party provider of goods and services to that person subject to the obligation of the person obtaining credit to pay at a later time. [5]

The conclusion that the amount financed under the later hire purchase agreement, including the negative equity amount of $6,000 is 'credit under a hire purchase agreement' is consistent with the comments in Fitz-Gibbon . The full amount financed is the provision of funds directly or indirectly to the entity subject to the entity's obligation to pay at a later time by instalments.

There is no requirement, including under item 20 in the table in regulation 40-5.12 of the GST Regulations, that credit supplied under a hire purchase agreement entered into on or after 1 July 2012 must be in relation to goods. [6] The amount provided under the later hire purchase agreement is to finance the new asset, liabilities associated with ownership and use of the asset and to discharge the entity's liability under the earlier hire purchase agreement net of the trade-in amount for the old asset.

Therefore, the amount provided by the financier under the later hire purchase agreement entered into on or after 1 July 2012 to the entity, including for the negative equity, is a supply of, or an interest in or under 'credit under a hire purchase agreement'. The supply also includes any credit for the other amounts financed under the later hire purchase agreement, including the component of the price that reflects the GST liability for the supply of the new asset.

The supply of credit under the later hire purchase agreement (including the negative equity amount) is a supply of 'an interest in or under a credit arrangement' covered by item 2 in the table in subregulation 40-5.09(3) of the GST Regulations. However, the supply is excluded from being a financial supply by item 20 of regulation 40-5.12 of the GST Regulations.

Therefore, the supply of credit under the later hire purchase agreement is a taxable supply if the requirements of section 9-5 of the GST Act are satisfied. The deferred repayment under the later hire purchase agreement of the amount of negative equity ($6,000), being similar to the repayment of a loan, is neither consideration for the supply of the asset nor consideration for the supply of credit.

The interest, fees and charges in respect of financing: • the price of the new asset, including GST • other amounts in relation to the acquisition of the new asset (registration, compulsory third party insurance and stamp duty); and • the amount of negative equity; are consideration for the supply of, or an interest in or under 'credit under a hire purchase agreement'. [7]