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Changes to the GST Treatment of Commercial Hire Purchase

If you are accustomed to purchasing motor vehicles and other business assets by way of a Commercial Hire Purchase (CHP), you are likely to be impacted by changes which come into effect on 1st July 2012 concerning the application of GST on CHPs. These changes were announced in the May 2010 Federal budget, but only take effect at the beginning of the 2013 financial year.

Whilst the nett impact on a business’s P&L is nil, it will impact your cashflow and you will need to consider whether CHP is still your best form of financing, or whether you should consider chattel mortgage or a finance lease. Perhaps more significantly, employees who have traditionally received a car allowance and have purchased their own vehicle using CHP will be impacted as they are unable to claim the extra GST paid as an input credit. CHP agreements entered into before 1 July 2012 will still be treated as per the current provisions, so it’s important that you review your situation immediately to decide whether you need to make a CHP purchase within the next few weeks.

Under the current provisions, GST is only payable on the purchase price of a vehicle or asset. Businesses that are registered for GST normally claim back this GST as an Input Tax Credit, either at the time of purchase (if accounting on an accrual basis) or progressively over the life of the loan (if accounting on a cash basis). The fees and interest charged over the course of the CHP loan are considered ‘mixed supply’ and are therefore not subject to GST.

From 1 July 2012, GST will be payable on the principal amount AND on all term charges (interest) and fees. This new component of GST will be payable upon settlement of the agreement, which can either be added to the loan amount or paid up-front.

As normal for a business, the extra GST charged can be claimed back as Input Tax Credits (progressively over the life of the loan). However, for entities and individuals that are not registered for GST, this extra GST will inflate the overall cost of purchasing via a CHP agreement. And for businesses it will still impact cashflow, as the extra GST will need to paid with each instalment before it is reclaimed at the time of the next BAS lodgement.

On the positive side, businesses using cash accounting will now be able to claim back the GST paid on the purchase price of the asset up-front (when they lodge their next BAS), in the same way businesses using the accrual method have always done.

Significantly, other forms of finance such as Chattel Mortgage will not be subject to GST on the fees, terms charges, and repayments. This may make Chattel Mortgages a more attractive option for some businesses, and worthy of consideration by individuals due to the savings on GST. Individuals purchasing a motor vehicle may also consider a Novated Lease, a form of finance in which the employer makes the repayments from the employee’s pre-tax salary (“salary sacrifice”). A Novated Lease is essentially GST-free, as the GST paid on the purchase price of the vehicle (up to the depreciation threshold), the lease repayments, and any packaged running costs can be claimed back as Input Tax Credits by the employer or financier, who passes this benefit on to the employee.

The best finance solution for each individual or business will differ, according to your circumstances, and you should get expert advice from your accountant or finance broker on which is the best solution for you.

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