Commercial Hire Purchase (C.H.P.) and The Treatment Of GST

In the Federal Budget from May 2010, from 1^st July 2012 new changes have been put in place that effect Commercial Hire Purchase Agreements and these changes have a major impact how GST is treated under these arrangements.

 

What Does This Mean?

 

Prior to these changes the terms charges (interest) and fees were classed as a ‘mixed supply’ in regards to the treatment of GST. Any C.H.P. agreement after this date, the fees and terms charges will be classed as a ‘taxable supply’ making them subject to GST.

 

What this means is that there will now be GST charged on the interest charges and the fees of any new C.H.P. agreement from 1^st July 2012. This would mean that if you are not a GST registered entity, a C.H.P. could cost you more than other available options, and this would be typical for people with car allowances, but not limited to non GST registered entities.

 

What About GST Registered Entities?

 

For those entities that have the ability to claim 100% of the GST as an input tax credit, the net effect would be the same as it was prior. It is now more crucial than ever to get proper accounting and taxation advice before opting to enter into a Commercial Hire Purchase Agreement, as there are other loan structures that could be more suitable, such as a Chattel Mortgage.

 

Are Commercial Hire Purchases Still Available?

 

There are financiers that have removed the option for Commercial Hire Purchase for these reasons, as it has also made the contracts a little harder to maintain and understand. In some cases, the borrower may have to pay the additional GST charges upfront, where other financiers may allow for it to be accrued over the loan term. You would need to discuss this with a professional who can advise which financiers still make these available, if your advice is to enter into a C.H.P. agreement.

 

What Other Options Are There?

 

It is definitely worth getting some professional accounting advice, but there are other business structures available such as Chattel Mortgage, Finance Lease, or Novated Lease depending on your employment status and conditions. It could be worth speaking to a finance broker in regards to what options are available to you, then getting your accounting advice to work out what solution suits your needs best.