Understanding Hire Purchase And GST Claims
Hire Purchase (HP) is a common method for acquiring business assets in New Zealand. However, GST treatment under a hire purchase agreement is not as straightforward as a regular cash purchase. This article explains how Hire Purchase works, and how GST should be claimed for tax purposes under New Zealand’s Goods and Services Tax (GST) rules.
What is a Hire Purchase?
A Hire Purchase is a financial arrangement where a business (the buyer) agrees to pay for an asset in instalments, but does not legally own the asset until the final payment is made. Despite the delayed ownership, GST rules in New Zealand treat the transaction as a sale at the outset.
Key GST Rule: Treat as an Outright Sale
Under the Goods and Services Tax Act 1985, a hire purchase is treated as a taxable supply made at the time the contract is entered into, not spread over the repayment period.
This means:
GST Claiming Requirements for Buyers
To claim the full GST upfront on a hire purchase, the buyer must:
Example
Let’s say your business purchases a vehicle for $34,500 (including $4,500 GST) under a hire purchase agreement with a 10% deposit and 24 monthly instalments.
Common Mistakes to Avoid
We recommend when you are entering into a Hire Purchase Agreement to purchase a business asset you provide us with a copy of the Hire Purchase Agreement and we can assist with entering the full purchase into your software to ensure you are claiming the GST in full up front and correctly.
What is a Hire Purchase?
A Hire Purchase is a financial arrangement where a business (the buyer) agrees to pay for an asset in instalments, but does not legally own the asset until the final payment is made. Despite the delayed ownership, GST rules in New Zealand treat the transaction as a sale at the outset.
Key GST Rule: Treat as an Outright Sale
Under the Goods and Services Tax Act 1985, a hire purchase is treated as a taxable supply made at the time the contract is entered into, not spread over the repayment period.
This means:
- The full GST amount is due at the time of signing, even if payments are spread over months or years.
- The supplier (the seller or finance company) must account for the entire GST on the sale upfront.
- The buyer (if GST registered) can claim the full GST input tax credit immediately, provided they meet the claiming conditions.
GST Claiming Requirements for Buyers
To claim the full GST upfront on a hire purchase, the buyer must:
- Be GST-registered at the time of entering into the agreement.
- Use the asset for taxable business purposes.
- Hold a valid tax invoice showing the full GST-inclusive amount of the asset (not just the deposit or instalments).
Example
Let’s say your business purchases a vehicle for $34,500 (including $4,500 GST) under a hire purchase agreement with a 10% deposit and 24 monthly instalments.
- At the time of agreement:
- GST on the full $34,500 is $4,500
- You can claim $4,500 GST in your next return
- The supplier must return $4,500 as output tax in their next return.
Common Mistakes to Avoid
- Claiming GST on instalments: This is incorrect under the invoice method.
- Claiming without a proper tax invoice: A quote or contract is not sufficient unless it includes all required tax invoice details.
- Claiming GST for personal use: Only the business-use portion is deductible.
We recommend when you are entering into a Hire Purchase Agreement to purchase a business asset you provide us with a copy of the Hire Purchase Agreement and we can assist with entering the full purchase into your software to ensure you are claiming the GST in full up front and correctly.
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