Yesterday the Commissioner published GSTD 2013/2 ‘Goods and services tax: when are second-hand goods acquired for the purpose of sale in the ordinary course of business under Division 66 of the A New Tax System (Goods and Services Tax) Act 1999’.

Section 66 of the GST Act entitles taxpayers to an input tax credit for the acquisition of second hand goods in certain circumstances, notwithstanding that the second hand goods are purchased from an entity which is not registered for GST. One of the requirements is that the second hand goods are acquired “for the purposes of sale or exchange (but not for manufacture) in the ordinary course of business)”.

The Determination takes the following view:

• the requirement will be satisfied where the second hand goods are acquired by an entity which is in the business of buying and selling second hand goods, and the goods are acquired for the purpose of being sold in the ordinary course of that business;
• the requirement will not be satisfied where the goods are acquired only in order to be leased, or where there is simply an intention that the goods will ultimately be sold after they are no longer required
• the requirement will be satisfied where an entity carries on a business involving the leasing and selling of second hand goods and:
  • the goods are acquired in the ordinary course of the business;
  • the contractual arrangements under which the second hand goods were acquired and leased contemplate that the entity will lease the goods back to the vendor for a defined term and then sell the goods at the conclusion of the lease term;
  • the contractual arrangements provide that the proceeds from selling the second hand goods will be compared with the residual value agreed upon commencement of the arrangements, in order to determine the extent of any indemnity payable by the lessee, or, entitlement of the lessee to participate in profits from the sale of the goods; and
  • the way the entity conducts its business objectively supports the conclusion objectively supports the conclusion that the second hand goods are in fact acquired for the purpose of sale.

The Determination acknowledges the decision of the Federal Court in Leaseplan Australia Limited v Commissioner of Taxation [2009] FCA 130. In that case it was accepted that neither a sole or dominant purpose test applied, and the test was whether the sale was “a purpose” for which the vehicles were supplied. In Leaseplan the Court found that the taxpayer had a dual purpose in acquiring motor vehicles, namely to lease them and to sell them at the end of the lease. The issue is therefore whether the evidence establishes the existence of a dual purpose. In Leaseplan the existence of the dual purpose was supported by the terms of the contractual arrangements between the parties which envisaged the sale of the vehicles at the end of the lease.

As noted in the Determination, the issue:

…requires careful consideration of the circumstances surrounding the acquisition of second hand goods, particularly where the acquirer carries on a business involving the leasing and selling of second-hand goods. In that context, consideration of how the entity conducts its business, and contractual arrangements under which it acquires and leases second-hand goods is necessary to determine whether subsection 66-6(1) is satisfied.

The Determination also states that the existence of a mere intention that the second-hand goods will ultimately be sold is not sufficient. For example, a tradesman buys a second hand ute for his business, with the intention that the ute will ultimately be sold.

The above matters do not appear controversial. However, when you read the Determination it appears that the Commissioner takes the view that second goods will only be acquired for a “dual purpose” of leasing and sale where the contractual documents expressly contemplate the sale of the goods (see the third dot-point above). In my view, this is an unduly narrow approach. In Leaseplan, the question was whether “the evidence” established the existence of a dual purpose in acquiring the vehicles. That the contract expressly provides for the sale of the vehicle at the end of the lease term certainly provides strong evidence of that dual purpose, but in my view it would be open to establish that dual purpose even where it was not expressly contemplated in the contract. For example, by evidence that the acquirer always or regularly sold the goods at the end of a particular period or evidence that the estimated residual sale value was a factor taken into account when negotiating the price paid for the goods.