Businesses with commercial leasing arrangements could have their cashflow affected by the release of a Tax Office ruling on the status of leases for GST assessment.
Deloitte Touche Tohmatsu partner Andrew Nutman says the final determination has the potential to undermine many commercial leasing agreements, with the interpretations contained in the determination causing cashflow problems for businesses providing goods through certain lease agreements.
The determination, GSTD 2001/2, provides details on whether the sale of goods by a lessor on expiry of a lease agreement is a separate supply to the lease of the goods.
Nutman says while the overall thrust of the determination is logical and reasonable for business, lessors should be concerned over the interpretation of the rights of lessees.
The ruling states:
"Where the lessee has the right or obligation to purchase the goods on termination of the lease, the agreement would be a hire-purchase agreement rather than a lease agreement."
Nutman says the use of the term 'right' in the interpretation is potentially misleading for many lessors.
"Under leasing arrangements, the GST is borne as the lease is paid, progressively, while under a hire-purchase agreement, the GST is incurred when the agreement is entered into," he says.
"But the ATO's use of the word 'right' in the determination implies that where a lessee has first right of refusal, the lease is treated as hire purchase, even though the lessee could walk away from an option to purchase the goods.
"In the meantime, the lessor would have been accountable for GST from day one of the lease."
Nutman says the ATO's interpretation is out of touch with the operation of leasing arrangements in other countries.
"Other jurisdictions determine the treatment on the basis of whether any additional consideration is required by the lessee to take possession of the goods, and the level of that consideration.
"It is vital that the ATO clarifies and corrects this issue, otherwise lessors will be potentially handicapped by unnecessary and unfair GST costs," he says.
Nutman says while the interpretation of a lessee's 'right' will cause confusion, he expects the overall basis of the ruling to generally be welcomed by business.
The ruling is available at the ATO's site
here.