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ATO Interpretative Decision

ATO ID 2006/4 (Withdrawn)

Goods and Services Tax

GST and bad debt adjustment in relation to hire purchase agreements
FOI status: may be released
  • This ATO ID is withdrawn with effect from 1 July 2012.
    Due to legislative changes to regulation 40-5.12 of the A New Tax System (Goods and Services Tax) Regulations 1999 the supply of credit under a hire purchase agreement entered into on or after 1 July 2012 is no longer a financial supply.
    Despite its withdrawal, this ATO ID continues to be a precedential view in respect of bad debt adjustments when hire purchase agreements entered into before 1 July 2012.
    On or after 1 July 2012, Division 136-A of the A New Tax System (Goods and Services Tax) Act 1999 would also not apply where the taxable supply of the goods and/or the taxable supply of the credit are/is not partly taxable.
    This document has changed over time. View its history.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

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.

Date of decision:  14 November 2005

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   Division 21
   section 21-5
   section 21-99 table item 1A
   paragraph 21-5(1)(c)
   Division 136
   Subdivision 136-A
   Subdivision 136-B

A New Tax System (Goods and Services Tax) Regulations 1999
   Regulation 40-5.09

Related Public Rulings (including Determinations)
Goods and Services Tax Ruling GSTR 2000/2
Goods and Services Tax Ruling GSTR 2002/2

Related ATO Interpretative Decisions
ATO ID 2006/2
ATO ID 2006/3

Other References:
Hire purchase, leasing and GST (Nat 3491)

Keywords
Goods and services tax
GST bad debts
Input taxed supplies
GST financial supplies
GST hire purchase
GST net amounts & adjustments
Decreasing adjustment

Business Line:  Indirect Tax

Date of publication:  13 January 2006

ISSN: 1445-2782

history
  Date: Version:
  14 November 2005 Original statement
You are here 20 September 2013 Archived

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