| |
| GST and motor vehicles |
| |
|
Contact: Paul Stacey
|
| |
Many businesses are facing the question of what to do with their company cars as car leases expire and other motor vehicles need replacement. Should they acquire new cars now or wait until after 1 July 2000? How should they finance the acquisitions? Should they lease the vehicles? Use hire purchase? Or fund the acquisitions out of internal resources? Should they trade in their current cars now or wait? The purpose of this article is to outline the GST considerations, insofar as they are known, that will need to be factored into these decisions.
Likely change in price of new motor vehicles
There has been comment in the press concerning the possible effects of GST on the motor vehicle industry. At the heart of these comments is a fear held by the local motor vehicle industry that it will haemorrhage between now and 1 July 2000 as individuals and businesses defer purchasing cars until after 1 July 2000. This fear is based upon the expectation that car prices will decline significantly after 1 July 2000 and the assumption that the purchase of a new car is expenditure that can be readily deferred.
The Government has headed this concern and introduced 2 measures that are intended to stem the mooted fall in car sales between now and 1 July 2000. They are designed to achieve this effect by smoothing the decline in price in real terms over the 2 years from 1 July 2000 to 1 July 2002, thereby reducing the incentive for consumers to defer purchases.
However, these measures will not wholly eliminate the price fall on 1 July 2000; rather, they will merely reduce the amount of the immediate fall in car prices. The 2 measures are as follows:
- introduction of a luxury car tax from 1 July 2000; and
- restriction of input tax recoverability for the purchase of a car between 1 July 2000 and 1 July 2002.
Luxury car tax
The stated intention of the luxury car tax is to "ensure that following the introduction of GST, the value of luxury cars will fall in price by about the same amount as a car just below the luxury car threshold" (per Explanatory Memorandum to the A New Tax System (Luxury Car Tax) Act 1999). This is demonstrated in the example on page 15.
The reason the price of a luxury car would otherwise fall by an amount greater than the fall in the price of an "ordinary car" is that these vehicles are presently subject to a greater amount of wholesale sales tax (WST) at the rate of 45%.
A "luxury car" for the purposes of the ANTS (Luxury Car Tax) Act 1999 is a motor vehicle of less than 2 years old, which is designed to carry a load of less than 2 tonnes and fewer than 9 passengers and whose value exceeds the "luxury car tax threshold". The definition excludes emergency vehicles and vehicles that have been modified to transport disabled people seated in wheelchairs.
The "luxury car tax threshold" is defined as the "car depreciation limit" contained in the Income Tax Assessment Act 1997 (ITAA 1997). This limit is used to restrict the amount of depreciation that can be claimed by a taxpayer. Currently, depreciation on a prestige car is only tax deductible up to a maximum of $55,134 over the life of the car.
There is presently a technical issue as to whether the $55,134 car depreciation limit is GST-inclusive. The Explanatory Memorandum to the ANTS (Luxury Car Tax) Act 1999 contemplates that the limit is GST-inclusive. However, the car depreciation limit is contained in the ITAA 1997 and expressed without regard to GST and nor can it be, since GST does not commence until 1 July 2000. Therefore, the Government will need to amend the ITAA 1997 to make the belief stated in the ANTS (Luxury Car Tax) Act 1999 law.
An ordinary car, in contrast to a luxury car, is one the price of which falls below the luxury car threshold, ie $55,134 or less. Included within that price may be some WST calculated at the 45% rate. This is because the threshold values for WST are different to the car depreciation limit. For WST motor vehicles the threshold is $36,995. WST is levied at 22% below that figure and at a rate of 45% on the excess over and above $36,995. This is illustrated in the example on page 15.
The luxury car tax does not apply to purchases by a car dealer, but upon the sale of the luxury car by the dealer. And, unlike GST, luxury car tax does not give rise to an input tax credit, but is a permanent cost borne by the purchaser.
Restricted input tax credit recoverability
If the luxury car tax has the effect of equalising the price decline between prestige and ordinary cars, then section 20 of the GST Transition Act has the effect of smoothing the price decline over 2 years. It achieves this by denying 100% of the input tax credits that would otherwise arise on the purchase of a motor vehicle during the year from 1 July 2000 to 30 June 2001. That denial of input tax credits decreases to 50% in respect of a motor vehicle acquired during the year 1 July 2001 to 30 June 2002. Thereafter section 20 does not restrict the recovery of input tax credits on motor vehicle purchases.
The effect of this provision is perhaps best explained by way of an example.
Example - Restricted recovery of input tax credit
Julie's Eatery is a catering company, specialising in door-to-door delivery of gourmet "home cooked" meals for dinner parties. Business is booming. The business needs to replace its existing delivery vehicle and is uncertain whether to purchase a new vehicle now or wait until after 1 July 2000. The replacement vehicle would need to be specifically fitted out for the business and would be solely used for business purposes. The vehicle that the business intends to purchase presently sells for $52,500. Julie's Eatery will be registered for GST.
As seen in the example on page 15, the top line price of this motor vehicle will decline by 4.88% to $49,936.42. This purchase will be a creditable acquisition for Julie's Eatery. Therefore, if it were not for section 69-10 of the GST Act, Julie's Eatery would be able to claim an input tax credit equal to 1/11 of the purchase price - $4,539.67. This would lower its effective purchase price to $45,396.75, a decline of 13.53%.
Section 20 of the GST Transition Act applies to all motor vehicles: luxury or ordinary cars, certain detachable trailers and bodies for motor vehicles or other bodies designed for transporting goods of a particular kind. The latter 2 types seem to be designed to catch the types of vehicles and carriers used in the road transport industry. This impression is confirmed by the examples given in the Explanatory Memorandum, which include:
- cars used by sales staff in carrying on the business of the enterprise;
- refrigerated trailers for semi-trailers; and
- milk tankers.
However, section 20 does not apply to motor vehicles, trailers or bodies etc purchased as trading stock, eg by car dealers as second-hand purchases and by businesses that would have been entitled to an exemption under WST and insurers receiving the item as part of the settlement of a claim.
The only other restriction to the recovery of input tax credits in respect of motor vehicles is that contained in section 69-10 of the GST Act. Unlike section 20, this limitation does not expire after 2 years, but applies to all purchases or acquisitions of motor vehicles that are subject to GST.
Moreover, it does not distinguish between new or used cars. Section 69-10 limits the recovery of input tax credits on the purchase of a motor vehicle to 1/11 of the purchase price, up to a maximum of the car depreciation limit of $55,134. This provision mirrors the limitation on the tax deductibility of depreciation on luxury vehicles.
GST treatment of used motor vehicles
The introduction of GST will lead to declining prices for new motor vehicles. Prices for used cars are, at least in part, a function of new car prices as well as the usual market forces. So, it is reasonable to presume that a drop in new car prices due to the introduction of GST will also depress used car prices after 1 July 2000.
However, these prices are already subject to downward pressure, especially in the small car market where there is a fierce battle for market share. This may limit any further decline in used car prices in the medium term. Moreover, if new car demand slackens between now and 1 July 2000, used car prices may temporarily rise in the short term.
What is crystal clear is the GST treatment of used cars. It has been reported in the press that used cars will be subject to GST on the dealer's margin. This is correct, but it is not "the dealer's margin" in the familiar sense, ie the dealer's profit margin. Moreover, there is no margin scheme such as that which applies to the sale of freehold interests under Division 75 or calculating GST on a gambling company's margin under Division 126.
Rather, the margin being referred to is the effect of an application of Division 66 of the GST Act. This Division deems an input tax credit in respect of certain acquisitions of second-hand goods. A used car is a second-hand good and the margin is effectively nothing more than the value added by the used car dealer. The GST treatment of second-hand goods is more fully discussed in GST Today , Issue 6, April 1999.
Financing acquisition of motor vehicle
There are basically four ways a business can fund the acquisition of a motor vehicle:
- out of retained earnings, ie own funds;
- out of general business borrowings;
- via leasing; or
- via hire purchase.
Acquisition funded by retained earnings
From a GST perspective, this is the most straightforward situation, but the least likely to occur in practice.
From the perspective of the motor vehicle dealer, the sale of the motor vehicle will be a taxable supply and the dealer will be liable to GST on that supply.
From the perspective of the purchaser, the purchase will be a creditable acquisition where the purchaser is a registered business and the motor vehicle is to be used in the course of that business. In this circumstance the purchaser will be entitled to input tax credits of 1/11 of the purchase price, subject to the rules mentioned earlier that restrict recovery of input tax credits.
Acquisition funded by borrowings
The analysis of the actual motor vehicle purchase remains unchanged, ie a taxable supply by the dealer and a creditable acquisition by the purchasing registered business.
The loan finance will be an input taxed supply by the financier. Accordingly, the financier will not be liable to GST on the amount of the loan extended. However, as it is an input taxed supply, the financier will not be able to recover input tax credits on the costs it incurs to the extent that these relate to the loan. This additional expense will be reflected in an increased rate or other charges payable on the loan. From the perspective of the borrower, there will be no entitlement to claim input tax credits in respect of loan repayments.
Acquisition via leasing
The essence of financing a motor vehicle by a lease is that instead of you or your business purchasing the motor vehicle, a finance company purchases it. The motor vehicle is then made available for the lessee's use for the period of the lease, subject to payment of the lease rentals, the lease rental being effectively nothing more than payment for the hire of the vehicle.
The foregoing is the legal position. However, motor vehicle leases also usually contain some form of provision that effectively allows the lessee to purchase the motor vehicle at its residual value upon expiry of the lease. Where the lessee does purchase the motor vehicle, then the lease is economically akin to acquisition of the motor vehicle by a loan.
This difference between the legal position of a motor vehicle lease and its economic reality is at the heart of the debate as to the correct GST treatment of leases. As discussed in GST Today , Issue 8, June 1999, there are currently 3 schools of thought as to the GST treatment of leases:
- finance lease payments will be fully subject to GST;
- the interest component of finance lease payments will not be subject to GST, but the non-interest component of the lease will be subject to GST; and
- finance lease payments will not be subject in any part to GST.
The arguments underpinning each of these 3 schools of thought are outlined in that article and are not repeated here. Rather, the relevant point is that if the first view is correct, then section 20 of the GST Transition Act probably does not serve to deny recovery of input tax credits on the lease payments. This is because section 20 only applies to the "acquisition or importation" of a motor vehicle during the 2 years to 1 July 2002. It does not apply to rental payments for the lease of a motor vehicle. Nor does the section 69-10 restriction apply to lease payments.
Example - Leasing a motor vehicle
Julie's Eatery is also considering leasing the vehicle. The lease would be a 4-year lease commencing on 1 January 2000. Monthly payments would be $967 (excluding GST) per month. From 1 July 2000 monthly payments will increase by 10% to $1,063 per month. There is a 30% residual value of $15,750 ($17,325) and an implicit interest rate of 8.5%.
Julie's Eatery will be entitled to input tax credits of $96 per month on payments made after 1 July 2000. Furthermore, the business will be entitled to input tax credits of $1,575 on the purchase of the motor vehicle at its GST-inclusive residual price as the "acquisition" occurs after 30 June 2002.
Whether it is preferable for Julie's Eatery to acquire the vehicle in this manner can only be determined after doing a detailed cost comparison with the cost of acquiring the vehicle by other means and after taking account of other business-related factors.
Acquisition via hire purchase
The bare bones of a hire purchase agreement are "a letting of goods with an option to purchase and an agreement for the purchase of goods by instalments" (section 184(2) of the Duties Act (NSW) 1997). In contrast to a lease agreement, each periodic payment comprises a capital and interest component. Section 40-5 of the GST Act provides the provision of credit under a hire purchase agreement will be an input taxed supply provided the credit or interest component is separately charged and disclosed to the hiree. Accordingly, the GST treatment will be the same as a bank loan, ie there will be no GST on the hire purchase payments, but equally the business acquiring the motor vehicle in this way will not be able to claim any input tax credits. It is likely that the cost of hire purchase finance will increase due to the inability of the financier to recover input tax credits on the initial purchase of the motor vehicle.
Subsequent legislative and regulatory changes may have impacted upon the subject matter of this article.
Paul Stacey
BA LLB ACA
Technical Editor - GSToday
ATP - GST
October 1999
March, 2001
|
| |
|
