An adjustment arises for GST purposes when a financier exercises its right to terminate a hire purchase (HP) agreement due to a default by the hirer and the outstanding instalment are no longer payable.
Facts
A financier enters into a HP agreement with a customer (the hirer) for the supply of goods on or after 1 July 2012.
Under the HP agreement, the financier makes two taxable suppliers (i.e., a supply of goods and a supply of credit), and payments for these suppliers are made by the hirer to the financier in instalments.
The financier accounts for GST on an accruals basis and has attributed the GST payable on the suppliers of the goods and credit under the HP agreement to an earlier tax period.
In a later tax period, there is a genuine dispute between the parties and the hirer defaults. so the financier exercises its right to terminate the HP agreement.
Under the HP agreement, although amounts in arrears up to the date of termination remain payable, the future outstanding instalments are no longer payable.
To compensate the financier for any loss under the HP agreement, it is entitled to a termination amount equal to the discounted future outstanding amounts reduced by the net proceeds of resale or rehiring.
A taxpayer may have to make a GST adjustment if GST on a supply was attributable to an earlier tax period, and adjustment event occurs so that the ‘previously attributed GST amount for the supply no longer correctly reflects the amount of GST on the supply (the ‘corrected GST amount’). Refer to S.19-40.
Upon termination of the HP agreement, the financier is no longer entitled to the future instalments that would have become due and payable if the agreement was still on foot.
Consequently, the consideration for the supply of goods and credit made under the HP agreement is reduced as the future instalments are no longer consideration for these supplies.
Therefore, the change (i.e., the reduction) in consideration for the suppliers of goods and credit under the HP agreement is an adjustment event (repossession of goods under a HP agreement is also an adjustment event – refer GSTR 2000/29).
As a result of the adjustment event, the previously attributed GST for the supplies (i.e., of goods and credit under the HP agreement) in no longer an accurate reflection of the consideration for the supplies (because the consideration has been reduced).
