GST and credit contracts legislation
2006 changes to the Goods and Services Tax Act clarify the definition of 'credit contracts' in relation to the Credit Contracts and Consumer Finance Act 2003.
Sections 3 and 10 of the Goods and Services Tax Act
Changes have been made to sections 3 and 10 of the Goods and Services Tax Act to clarify the definition of "credit contracts" in relation to the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
The GST Act makes two cross-references to the credit contracts legislation:
- in connection with the definition of "financial services" under which services are exempt from GST; and
- a special valuation rule that separates the interest component under a credit contract from the principal value of the goods and services supplied under the contract. Under special valuation rules GST applies to the principal value but not the interest.
A problem was identified with a consequential change made to the GST Act, with effect from 1 April 2005, to reflect the new definition of "credit contract" in the CCCFA. Some lease arrangements, which were previously treated as "credit contracts" under the Credit Contracts Act 1981, no longer qualified as "credit contracts" under the CCCFA. This is because the term "credit" applies to a narrower set of contracts under the CCCFA.
For a contract to be considered a "credit contract" it must meet one of three limbs of the definition of "credit". 1 The most significant of these is that the contract must defer a payment of a debt. There are two elements to this requirement:
- there must be a debt; and
- the payment of that debt must be deferred.
Many finance leases do not defer the payment of debt. Each payment is due and payable as and when required under the lease. The total amount of the lease payments are not due on day one of the lease with the payments deferred over the term of that lease. Because of this, there is no deferral of a debt.
By contrast, before the CCCFA came into effect on 1 April 2005, a lease was treated as a "credit contract" under the Credit Contracts Act 1981 if a contract involved advancing money in return for a promise, the consideration of which exceeded the amount initially advanced. 2
The result of this change in the meaning of "credit" is that lessors who entered into certain lease arrangements after 1 April 2005 on the expectation that GST would not apply to the interest component must now return GST.
To help overcome this problem, the new changes to the GST Act allow taxpayers a choice as to which definition of "credit contract" should be used. The measures are intended to be a temporary solution until a single definition of "credit contract" for the purposes of the GST Act is developed.
The changes to sections 3 and 10 of the GST Act were included in the bill after it was introduced.
Sections 3(2) and 10(5A) have been amended to reinsert the old 1981 definition of "credit contract" for leases entered into after 1 April 2005.
New sections 3(3B) and 10(5B) allow taxpayers the choice to exclude as "credit contracts" contracts that would not be credit contracts under the CCCFA.
New sections 3(3C) and 10(5C) also allow credit contracts under the CCCFA, but not under the Credit Contracts Act 1981, to continue to be treated as "credit contracts".
The changes apply from 1 April 2005.