Second-hand goods credits under GST: when are they available?

The decision in LeasePlan Australia Limited v Commissioner of Taxation [2009] FCA 1309 challenges the Commissioner's traditional view of when second-hand goods will be acquired for the purposes of "sale or exchange" in the ordinary course of business under GST law.

Justice Middleton looked through LeasePlan's "intermediate" purpose of leasing the goods and viewed the lease and ultimate sale as a single "composite transaction". As such, LeasePlan was entitled to a second-hand goods credit under the GST law. This decision may mean taxpayers will be entitled to second-hand goods credits in circumstances in which those credits would have previously been denied.

The problem with second-hand goods

Under the general rules, the recipient of a supply will only be able to claim an input tax credit where the supply to the recipient was a taxable supply. The second-hand goods trade is adversely affected by this limitation. For example, an individual buys a new car for personal use. The sale of the car to the individual is a taxable supply upon which GST is payable. The individual cannot claim an input tax credit for that GST (because the car is for private use) and the GST becomes embedded in the cost of the car.

When the individual comes to trade in that car or sell the car to a second-hand dealer, the supply will not be taxable and no input tax credit will be available to the dealer. When, however, the dealer comes to sell the second-hand car, that sale would be a taxable supply and the dealer would be required to remit GST on the supply. Where the purchaser of the second-hand car is an individual, the second round of GST becomes embedded in the cost of the car and the process repeats.

The second-hand goods credit

This is the problem that the second-hand goods credit was intended to solve. It was intended to give the second-hand goods dealer a hypothetical input tax credit equal to 1/11^th of the sale price (or trade in value) of the car sold to the dealer by the individual. Thus, the net tax collected on the sale by the second-hand dealer would only be 1/11^th of the dealer's margin (ie. 1/11 x (Sale Proceeds – Trade in value).

The ultimate sale of the goods is critical. The second-hand goods credit can only be claimed when the goods are sold and is limited to the lesser of 1/11^th of the trade in value or 1/11^th of the sale proceeds.

The facts of the case

This case involved sale and leaseback arrangements entered into between LeasePlan and its customers. Under the transaction documents, the customer would sell a car to LeasePlan and LeasePlan would agree to lease the car back to the customer. The lease also required LeasePlan to sell the vehicle at the end of the lease. The evidence showed that the cars were indeed sold quickly following the end of the lease, on average only 19 days after.

Commissioner's arguments

The Commissioner argued that it was the lease that was the real purpose for LeasePlan acquiring the cars and the "sale of the vehicles was a mere incident to the immediate purpose of leasing".

Construe the transaction as a whole

The approach of Middleton J was very much to construe the transaction as a single composite transaction. The transaction did involve leasing but "at least one purpose was to make profit through eventual sale". For Middleton J, this was sufficient to satisfy the requirements of section 66-5(1) and he held that the cars were acquired for the purpose of sale.

Implications