FAQ: What changes were made to the GST treatment of Commercial Hire Purchase (CHP) on 1 July 2012?

What changes were made to the GST treatment of Commercial Hire Purchase (CHP) on 1 July 2012?

As of the 1 July 2012, changes will be made to the tax treatment of the Commercial Hire Purchase (CHP) agreement. The adjustments are the result of changes announced as part of the May 2010 Federal Budget and will have an impact on the cost and effectiveness of a CHP agreement for individuals eligible for a car allowance, and some businesses.

Under a pre-1-July-2012 CHP agreement, GST is only charged on the purchase price of the vehicle or asset. Businesses registered for GST are eligible to claim some or all of the GST back as Input Tax Credit.

The changes introduced in the May 2010 Federal Budget have altered the classification of any fees and interest applicable to the CHP from "mixed supply" to "taxable supply". After 1 July 2012, the fees and any interest charged on the Commercial Hire Purchase agreement will be considered fully taxable and will subject to GST charges.

The new GST charges will be payable upon settlement of the contract, and customers will have the option to add the cost to the loan or pay the charges up front.

For individuals and employees eligible for a car allowance this will make a Commercial Hire Purchase a more expensive finance option, as they will be required to pay additional GST and are not eligible to claim any of the GST back.

For businesses, partnerships and sole traders registered for GST, the changes will ultimately have no net affect. They will, however, have significant affect on cash flow as the extra GST will need to be paid up front by the business and claimed back later on Business Activity Statements (BAS).

Current Commercial Hire Purchase agreements, and agreements entered into up until the 30 June 2012, will not be affected by the changes.

For more information about the implications of the changes to the CHP agreement (including worked examples), please click here to read our complete guide. You can also find out more about alternatives to a Commercial Hire Purchase.