Changes to the GST Treatment of Commercial Hire Purchase (CHP) from July 2012

As a result of a change announced in the May 2010 Federal budget, the application of GST to the Commercial Hire Purchase (also known as a Hire Purchase, HP or CHP) finance product will change as of the 1st of July 2012. This change is the most significant revision to the tax treatment of a commercial finance product in many years and will have a significant impact on the cost of a Hire Purchase agreement for many businesses, as well as all employees who are eligible for a car allowance. If you or your business is considering a Commercial Hire Purchase to finance the purchase of a car, commercial vehicle or other piece of business equipment then it is important that you understand and consider the impact that these changes may have. Read on to find out what is changing, how it impacts you, and what alternatives exist. Or, you can simply ask the experts: stratton is here to help. Give us a call on 1300 STRATTON (787 288) or complete a quick online finance enquiry and one of our experienced finance consultants will be in touch.

What changes are being made to the GST treatment of Hire Purchases?

Currently, under a CHP agreement, GST is only payable on the purchase price of the vehicle or the upfront value of the asset, and when registered for GST the hirer can apply an equivalent Input Tax Credit to claim back some-or-all of the GST paid. Under current rules, any fees and interest charged on a HP are considered "mixed supply" and hence no GST applies.

The changes introduced in the May 2010 Federal budget have altered the classification of any fees and interest payable on a HP from "mixed supply" to "taxable supply" from 01/07/2012 onwards, and therefore from this date all Commercial Hire Purchase contracts will be considered fully taxable. While previously GST was only payable on the purchase price of the vehicle or asset, as of the 1 July GST will be payable on the purchase price of the asset or vehicle, all term charges (interest), and any fees. The newly-introduced GST on fees and interest will be payable upon settlement of the agreement, and can either be added to the loan or paid up-front. For those customers who are registered for GST, the extra GST charged can then be claimed back as Input Tax Credit progressively over the life of the loan.

The changes will apply to all CHP contracts that start on-or-after 1 July 2012 (FY13 and after), with no transitional period applying. All current contracts, and any new CHP agreement signed up until 30 June 2012, will be unaffected. Additionally, under current (pre 1 July 2012 - FY12 and prior) rules, businesses using Cash accounting can claim back the GST paid on the purchase price of the asset financed with a Hire Purchase progressively over the term of the agreement. As of the 1 July 2012 this rule also changes, and businesses using the Cash accounting method can claim GST paid on the purchase price of the asset financed with a Hire Purchase in the same way businesses as using the Accruals accounting method: up-front, when they lodge their next BAS. While the changes introduced will have a significant effect on Commercial Hire Purchase agreements, it is worth nothing that no changes are being made to Chattel Mortgage agreements.

When do these changes occur?

The changed GST treatment of CHP agreements applies to all contracts which start on-or-after the 1st of July, 2012 (Financial Year 2013 and after), with no transitional period available. All current Hire Purchase contracts and all new HP agreements which begin up until 30 June 2012 (Financial Year 2012 and prior) will not be affected by these changes.

What are the implications of these changes?

For businesses (including companies, partnerships and sole traders)

When registered for GST and purchasing the vehicle or asset for business purposes, the GST charged on the purchase price of the asset and on any upfront fees can be claimed back as an Input Tax Credit (ITC) on the business' next BAS. The GST on the terms charges (interest on the loan) can also be claimed back as an ITC, but must be claimed progressively over the life of the loan. This means that the changes being introduced to Commercial Hire Purchase contracts as of the 1 July 2012 will essentially have no net effect on GST registered business, including companies, partnerships and sole traders. However, they will produce significant differences in cash-flow, as the extra GST needs to be paid by the business and then later claimed back on Business Activity Statements. For this reason, businesses financing cars, commercials vehicles and other business equipment should consider other finance options which are likely to be present a more cash-flow and/or cost effective option after the 1st of July.

For employees eligible for a car allowance

The changes to Commercial Hire Purchase agreements as of 1 July 2012 will mean that individuals who are eligible for a car allowance, and choose to use a CHP agreement to finance a car with their car allowance, will be liable to pay the newly introduced GST on the terms charges (interest) and up-front fees. As these individuals are employees of a business and typically not registered for GST, they will not be able to claim an Input Tax Credit for the extra GST paid. If the employee still chooses to proceed with a CHP, they can opt to pay this GST directly to the financier from their own funds at the time of settlement or elect to have the GST amount included in the amount financed in their Commercial Hire Purchase agreement. These changes make the Commercial Hire Purchase option much more expensive for employees or individuals using a car allowance as they will have the additional GST levied but are not able to claim any of it back. For this reason, employees financing a car using a car allowance should consider other finance options which are likely to be present a more cost effective option after the 1st of July.

Examples of the changes to CHP

This first worked example demonstrates the effect that the changes to GST will have on CHP agreement settled after 1 July 2012. It compares an example CHP agreement started prior to June 30 with the same agreement started after 1 July 2012:
Table 1: Hire Purchase before and after 1 July 2012
 Prior to June 30 2012Post July 1 2012
Purchase Price $ 55,000.00
(incl. GST of
$5,000.00)
$ 55,000.00
(incl. GST of
$5,000.00)
Lender Fees $ 395.00 $ 434.50
Amount Financed $ 55,395.00 $ 55,434.50
Term (months) 60 60
Balloon Amount (30%) $ 16,500.00 $ 16,500.00
Monthly Payment (pre-GST) $ 877.00 $ 878.00
 
Terms Charges (total interest) $ 13,726.00 $ 13,734.00
GST on Terms Charges $ 0.00 $ 1,373.00
 
Additional GST added to
Monthly Payment
(GST on Terms Charges / 60)
$ 0.00 $ 23.00
Total Monthly Payment $ 877.00 $ 901.00

As you can see, the newly-introduced GST on interest and fees has the effect of increasing monthly repayments by $24/month for a total life-of-loan difference of $1,440 (before taking into account any ITCs which may be claimed). In our second worked example compare we a CHP agreement started before and after 1 July 2012 with to a Chattel Mortgage (the most common alternative to a CHP for businesses):

Table 2: Chattel Mortgage vs Hire Purchase before and after 1 July 2012
 CHP
(prior to
June 30 2012)
CHP
(post
July 1 2012)
Chattel
Mortgage
Purchase Price $ 55,000.00
(incl. GST of
$5,000.00)
$ 55,000.00
(incl. GST of
$5,000.00)
$ 55,000.00
(incl. GST of
$5,000.00)
Lender Fees $ 395.00 $ 434.50 $ 395.00
Amount Financed $ 55,395.00 $ 55,434.50 $ 55,395.00
Term (months) 60 60 60
Balloon Amount (30%) $ 16,500.00 $ 16,500.00 $ 16,500.00
Monthly Payment (pre-GST) $ 877.00 $ 878.00 $ 877.00
 
Terms Charges (total interest) $ 13,726.00 $ 13,734.00 $ 13,726.00
GST on Terms Charges $ 0.00 $ 1,373.00 $ 0.00
 
Additional GST added to
Monthly Payment
(GST on Terms Charges / 60)
$ 0.00 $ 23.00 $ 0.00
Total Monthly Payment $ 877.00 $ 901.00 $ 877.00

This second example again demonstrates the effect of the newly-introduced GST on interest and fees has on a Hire Purchase, and also shows how a Chattel Mortgage is essentially equivalent to a Hire Purchase under the old rules.

What alternative finance options exist?

For businesses (including companies, partnerships and sole traders)

Companies, partnerships, sole traders and other businesses who have historically financed vehicles and business equipment using on a CHP may wish to consider the other finance options available to them, such as a Chattel Mortgage or a Finance Lease (Car Lease):

Chattel Mortgage

A Chattel Mortgage is a finance option under which the financier advances funds to the customer in order to purchase a vehicle, and the customer takes ownership of the vehicle at the time of purchase. Under a Chattel Mortgage the financier takes security over the vehicle or asset by registering a Security Interest on the PPSR. GST is paid on the purchase price of the vehicle, but is not charged on any lender fees, terms charges, the residual value or the monthly repayment. The advantage for businesses is that all the GST paid (again, only chargeable on the purchase price of the vehicle) can be claimed back as soon as they lodge their next BAS. A Chattel Mortgage is a popular alternative to the Commercial Hire Purchase. The amount of GST paid on a Chattel Mortgage remains unchanged after July 1 2012, and is equivalent to the GST that was payable on a Hire Purchase prior to 1 July 2012.

Finance Lease (Car Lease)

Under a Car Lease (or "Finance Lease") the financier purchases the vehicle on behalf of the customer and leases the vehicle back to them over the period of the lease in return for monthly instalments. At the end of the contract, the business can either choose to dispose of the vehicle, pay the residual and take ownership of the vehicle, or refinance the contract. Any GST contained in the purchase price of the vehicle (up to the Depreciation Threshold) is claimed as an ITC by the financier, and the amount financed is reduced by an equivalent amount. GST is charged on any fees, the monthly lease rental (including interest charges) and on the residual value on the loan. Businesses registered for GST are eligible to claim the GST paid as an Input Tax Credit progressively over the life of the lease.

For employees eligible for a car allowance

For individuals/employees eligible for a car allowance, Commercial Hire Purchase agreements will become more expensive as of 1 July 2012. There are a number of other finance options which can be considered and which are likely to be more cost-effective:

Chattel Mortgage

A Chattel Mortgage is a finance option under which the financier advances funds to the customer in order to purchase a vehicle, and the customer takes ownership of the vehicle at the time of purchase. Under a Chattel Mortgage the financier takes security over the vehicle or asset by registering a Security Interest on the PPSR. GST is paid on the purchase price of the vehicle, but is not charged on any lender fees, terms charges, the residual value or the monthly rental. A Chattel Mortgage is a viable alternative to the Commercial Hire Purchase for employees with a car allowance. The amount of GST paid on a Chattel Mortgage remains unchanged after July 1 2012, and is equivalent to the GST that was payable on a Hire Purchase prior to 1 July 2012.

Salary Packaging (through a Novated Lease or Fully Maintained Novated Lease)

A Novated Lease allows an employee to "salary package" a vehicle, whereby an employee leases a vehicle and their employer agrees to pay the monthly repayments to the financier, and optionally the maintenance costs of the vehicle, on the employees’ behalf. The employer makes these repayments from the employees’ pre-tax salary ("salary sacrificing"), which can make a Novated Lease a very tax effective (and hence cost-effective) option for many employees, and often represents the cheapest finance option available to them. A non-maintained Novated Lease (or finance-only Novated Lease) allows the employee to salary sacrifice the monthly repayments on the vehicle only, while a Fully-Maintained Novated Lease gives employees the option to finance both the vehicle and its operating expenses - including petrol, servicing, tyres and insurance - and make these payments from their pre-tax salary. 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 Credit by the employer and/or the financier, who then passes this benefit on to the employee.

Consumer Loan (Car Loan)

Under a Consumer Loan (Car Loan) the financier provides funds to the business to purchase the vehicle. The customer takes ownership of the car at the time of purchase and the financier takes an interest in the vehicle as security for the loan. GST is paid on the up-front purchase of the vehicle, but not on any fees, interest, the residual value or the monthly repayments. For employees eligible for a car allowance a Consumer Loan represents a simple option, however it may not be as flexible or cost-effective as the Chattel Mortgage and Novated Lease options presented above.

Which option is best for me or my business?

There is no one-size-fits-all answer to the question of which option is best for you or your business, as every business and individual is different and each has their own set of unique circumstances and requirements. stratton’s expert finance consultants can help, using their industry knowledge and expertise to examine your individual circumstances and needs in order to determine the most suitable solution. If you have any questions, or if you would like some more information regarding the July 1 2012 changes to Commercial Hire Purchase agreement then please contact your personal finance consultant, call us on 1300 STRATTON (787 288) or complete a quick online enquiry and one of our finance consultants will give you a call. Or, if you're in the market for a new car or commercial vehicle, get an instant, online car finance quote and find out how much stratton can save you.