Chapter 2 - Hire purchase time of supply rule and land transactions
Scope of the “hire purchase agreement”
2.1 There is currently some uncertainty over the scope of the term “hire purchase agreement” used in the Goods and Services Tax Act 1985 (the GST Act), specifically over whether an agreement for the sale of land on deferred terms can be a hire purchase agreement.
2.2 A hire purchase agreement is a contract in which a purchaser pays for goods, in parts, over a period of time. The Income Tax Act defines a “hire purchase asset” as “personal property which is the subject of a hire purchase agreement”.[2] This is consistent with the now repealed Hire Purchase Act, which did not include real property (i.e. land) in the scope of “goods”. For the purposes of the Income Tax Act, a sale of land on deferred terms is therefore not capable of being a hire purchase agreement.
2.3 The GST Act does not contain a separate definition of a “hire purchase agreement”, but since 1 April 2005 has referred to the definition in section YA 1 of the Income Tax Act 2007. Before that, the GST Act referred instead to a definition in the Hire Purchase Act 1971.
2.4 The GST Act treats the time of supply for “goods and services which are supplied under a hire purchase agreement” to be the time the agreement is entered into. The word “goods” has a broad definition in the GST Act and includes real property.
2.5 The question of whether real property can be the subject of a hire purchase agreement therefore differs in the Income Tax Act and the GST Act.
2.6 When the GST Act was changed to use the Income Tax Act definition of a hire purchase agreement, rather than the Hire Purchase Act, it was not intended to widen the scope of hire purchase agreements to include land for GST purposes.
Suggested solution
2.7 We consider that the definition of “hire purchase” agreement in section 2(1) of the GST Act should be amended to clarify that, to avoid any doubt, land is specifically excluded from the scope of hire purchase agreements. This will ensure that a sale of land on deferred terms is not a hire purchase agreement for the purposes of the GST Act, and the use of the term is therefore consistent between the GST and Income Tax Acts.
Timing advantages
2.8 Providing that land cannot be the subject of hire purchase agreements for GST purposes, providers of some long-term sale and purchase agreements for land could enjoy a GST timing advantage. This situation would arise if an up-front tax deduction for GST were claimed for the purchase of land, but the corresponding output tax were able to be paid in the distant future, resulting in a timing advantage. The example below describes this.
Example A mortgage provider (sometimes referred to as a “wrap mortgage provider”) provides a property to a purchaser but retains the title to the property until the purchaser completes the required payments. Ultimate settlement can sometimes occur up to 30 years after the date of the initial agreement. The transaction is arguably a “hire purchase agreement”, under which the mortgage provider would be required to account for the full amount of output tax on the date the agreement was entered into. If this was not a hire purchase agreement, the mortgage provider could claim a full input tax deduction on the date of the initial agreement to purchase the property. However, the mortgage provider would not be required to account for the full amount of the corresponding output tax until the date of settlement although GST will be returned on payments made before the date of settlement. |
2.9 Section 19D of the GST Act was intended to prevent timing advantages on significant deferred settlement transactions, particularly involving vendors on the payments basis and purchasers on the invoice accounting basis. Section 19D achieves this by requiring the supplier of goods sold for a consideration of more than $225,000 to account for GST on an invoice basis.
2.10 The section also prevents people from avoiding the provision by splitting up the supply so that each supply falls below the $225,000 threshold. In these cases, the Commissioner may treat the supply as having been made for consideration of more than $225,000 if the Commissioner believes that the person made more than one supply to avoid the application of section 19D.
2.11 However, since mortgage providers may have legitimate commercial reasons for splitting transactions into more than one supply or the value of the mortgages falls below $225,000, this subsection may not apply.
Suggested solution
2.12 It is suggested that section 19D of the GST Act be amended so that where transactions involve the deferred settlement of land and periodic payments, the registered supplier will be required to account for GST on the supply at the time the agreement is entered into, rather than periodically. This achieves a similar outcome as hire purchase agreements but in a more appropriate context.
Scope of definition
2.13 There is also a separate concern with the scope of the definition of “hire purchase agreement” in the Income Tax Act 2007.[3] It is arguable that this definition does not adequately cover agreements with an option to purchase.
2.14 As discussed previously, the definition of “hire purchase agreement” originates from the Hire Purchase Act 1971 and is intended to cover two types of agreement. The first is one where the goods are let or hired to a person with an option to purchase (the “option to purchase agreement”). The second is when a person has agreed to purchase the goods with a condition (a “conditional contract of sale”). The main difference between the two is whether the person has agreed to purchase the goods at the time the relevant contract is entered into.
2.15 The rewrite of the hire purchase agreement definition contained a drafting error, which arguably means the person’s upfront agreement to purchase the goods is also required in order for the arrangement to be an option to purchase agreement. This interpretation is inconsistent with the policy intent behind the definition, which (as stated) is to capture both forms of agreement.
Suggested solution
2.16 The definition should be clarified to achieve the policy intent, so that paragraph (a)(i) explicitly incorporates contracts when the person has an option to purchase, but that option is not exercised until a later date.
Suggested application date
2.17 We consider that the amendment suggested above (concerning the scope of the definition) should apply from 1 April 2005, as this was the date that the GST Act adopted the Income Tax Act definition of “hire purchase agreement”.
2.18 In our view this application date should apply universally. This is because the definition of “hire purchase agreement” arguably does not include “option to purchase agreements” and is:
- contrary to the former Hire Purchase Act; and
- contrary to the position adopted by many taxpayers, on the basis of a clearly understood policy.
2.19 However, we are aware that some taxpayers have adopted the opposite position. To allow disputes on the existing wording to run their course, we suggest a “savings” provision for taxpayers that have filed returns on a contrary basis.
2 Section YA 1, Income Tax Act 2007.
3 Section YA (1) and, before that, section OB 1 of the Income Tax Act 2004.