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Industry Guide:

Leasing

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FREQUENTLY ASKED QUESTIONS

Registration

1. If I am a lessor who leases assets to various lessees, am I required to be registered for GST?

Since both financial and operating lease are taxable supplies, you must be registered if your annual taxable turnover exceeds the prescribed threshold. In calculating this turnover, you must include the value of the financial lease, operating lease and other relevant taxable supplies but exclude your exempt supplies and disposal of assets. 


How to Charge GST 

2. As a result of a finance lease transaction, I charge my customer in one lump sum which includes the cash price of the asset and the interest charge. How do I calculate the GST on this transaction? 

Since the interest charge is not shown separately, GST will be chargeable on the whole amount (cash price and interest). 

Example 1: 

Assuming the asset is supplied by a GST registrant. The cash price of the asset is RM100,000. The rate of GST is 6%, and the interest rate is 3%. Period of lease is 12 months. The GST treatment is as shown below: 

Cash price + Interest charge (one lump sum as shown in the tax invoice)  RM103,000 
GST @ 6%  RM6,180
Amount payable in installment  RM109,180 

The lessor has to account RM6,180 as his output tax in the relevant taxable period in which he makes his first supply. GST will not be charged on the subsequent lease payment. 

3. What if I charge the cash price of the asset and the interest charge is shown separately in a finance lease?

Since the interest charge is shown separately from the cash price of the asset, GST will only be charged on the cash price of the asset..

Example 2: 

Using the same facts as in Example 6, the GST charge will be as follows:

Cash price  RM100,000 
GST @ 6%  RM6,000 
Cash price + GST  RM106,000 
Interest charge(RM 100,000.00 x 3%)  RM3,000 
Amount payable in installment  RM109,000

The lessor has to account RM6,000 as his output tax in the relevant taxable period in which he makes his first supply. GST will not be charged on the subsequent lease payment.  

4. How do I charge GST in an operating lease if the interest charge is not shown separately?

Since the interest charge is not separated, GST will have to be charge on the whole amount and at each lease payment. In this example, the amount of rental payments is taken to be the same throughout the period of the lease. (Otherwise, the amount may also be taken as the actual transacted value for each rental payment due).

Example 3:  

Using the same fact as in Example 6, the GST charge will be as follows:

Cash price + interest charge  RM104,000.00 
Monthly installment amount (RM104,000.00/12)  RM8,666.67 
GST @ 6%  RM520.00 
Monthly installment amount + GST  RM9,186.67

The lessor has to account RM520 as his output tax in the relevant taxable period for each lease payment.  

5. How do I charge GST if the interest charge is separately shown in an operating lease?

Where the interest charge is separately shown, the GST will be only charged on the cash price of the asset, as shown in example below.

Example 4:  
 
Using the same facts as in Example 6, the GST charge will be as follows:

Cash price RM100,000.00
Monthly payment amount on asset (RM100,000.00/12)  RM8,333.33 
GST @ 6%  RM500.00 
Interest Charge (RM 8,333.33 x 3%)  RM249.99
Interest Charge (RM 8,333.33 x 3%)  RM9,083.32

The lessor has to account RM500 as his output tax in the relevant taxable period for each leased payment. 


Input Tax Credit (ITC) 

6. I am a lessor leasing assets purchased from abroad and locally for which I am charging interest on the lease. How much input tax credit can I claim on my leased asset? 

If you purchase assets from outside Malaysia, you pay GST upon importation and claim input tax credit on the GST incurred. Similarly, if the asset is purchased locally from a registrant, the local supplier will charge you GST and then you claim input tax credit upon receipt of the supplier’s tax invoice or when payment is made by you to the supplier, whichever is the earlier.

Example 5:  

The lessor purchases an asset at a cash price of RM100,000 and then leases the asset for a year. The GST rate is 6% and assuming the interest rate is 3%.

Local supplier’s tax invoice:

Cash price           RM100,000

GST @ 6%           RM6,000  (lessor’s input tax)

Total                      RM 106,000.00 

Therefore, the lessor is entitled to an input tax credit of RM6,000

Lessor’s tax invoice:

Cash price                         RM100,000

GST@ 6%                          RM6,000.00

Interest Charges@ 3%    RM3,000

Total                                   RM109,000 

7. As a lessee, I use the leased asset for the furtherance of my business. How much input tax credit can I claim?

If the asset can be attributed wholly to the making of taxable supply then you can claim the input tax credit in full. If you make both exempt supply and taxable supply, then you only claim the input tax credit that is attributable to taxable supplies.

Example 6: 

ABC Sdn. Bhd. is a GST registrant who makes wholly taxable supplies (commercial/industrial buildings). For the relevant taxable period, taxable supplies amounts to RM1,500,000. Under a financial lease agreement, ABC Sdn Bhd incurs GST amounting to RM25,000 on the leased asset (crane). The crane is used wholly for building a commercial/industrial complex. Therefore, ABC Sdn Bhd is entitled to an input tax credit of RM25,000

Example 7: 

XYZ Sdn. Bhd. is a GST registrant who makes both taxable (commercial/industrial buildings) and exempt supplies (residential houses). For the relevant taxable period, the exempt supplies amounts to RM2 million and taxable supplies amounts to RM3.5 million. Under a financial lease agreement, XYZ Sdn Bhd incurs GST amounting to RM25,000 on the leased asset (crane). The crane is used for building both commercial/industrial complex and residential houses. Therefore, XYZ Sdn Bhd is entitled to an input tax credit of RM15,909.09

Turnover method to claim input tax credit of :

RM25,000 X {RM3.5 mil / (RM3.5mil + RM2.0mil) } = RM15,909.09

 

Tax Invoice 

8. In a financial lease, do I need to issue a tax invoice for each lease payment since GST is charged on the first lease payment?

Since the full GST liability is charged on the first transaction, you issue your tax invoice only once on the first payment for the lease contract. For subsequent payments, no tax invoice is required to be issued. 

Example 8: 

Using the same facts as in Example 6

Lessor tax invoice: (on the first lease payment)

Cash Price                                  RM100,000

GST @ 6%                                  RM6,000

Interest Charge @ 3%              RM3,000

Total                                             RM109,000

Subsequent lease payments:

Principal                                     RM8,333.33

Interest                                        RM249.99

Total installment                     ♦RM8,583.32 

 ♦No GST is charged on subsequent payments
 

9. Do I have to issue a tax invoice for each lease payment to my customer in an operating lease? 

Yes, a tax invoice is required to be issued on each and every successive payment. 

Example 9: 

Using the same facts as in Example 6 

Leased asset:

Cash Price                                 RM100,000
 
GST @ 6%                                 RM6,000

Interest charge (@3%)            RM3,000

Lease Period                             1 year (12 payments)

Lessor’s tax invoice issued for monthly rental:

Principal                                    RM8,333.33

GST (RM6,000 /12)                 RM500.00

Interest charge                         RM249.99

Total monthly rental                RM9,083.32

The lessor accounts for GST of RM500 on each leased payment received. 

10. In a lease agreement, a lessee is normally given a payment schedule at the onset of the leasing period and the lessor will not issue any invoice for each successive payment. However a receipt is issued for the payments. Can the receipts be treated as a tax invoice?

The receipts can be treated as a tax invoice provided it contains the particulars of a tax invoice. Those particulars can be obtained from the General Guide. 


Lease and Purchase

11. What happens if at the end of the operating lease, the lessee takes ownership of the goods?

At the end of the lease, the lessee may have to pay GST on residual payments under lease agreements. These are payments the lessee makes to take ownership of the goods, which is treated as a separate transaction to the lease agreement. If the lessee purchases the goods at the end of the lease agreement to continue using it for his business, the lessee may be eligible to recover the input taxes he paid on the price of the purchase. 


Leasing an Asset to a Foreigner 

12. What is the treatment of GST on the leased asset if the lessee is a foreigner?

If the lessee is a foreigner and the leased asset is to be located used outside Malaysia, the supply of leasing services by the lessor is a zero rated supply. The lessor exports the goods to the foreigner, by declaring in the Custom Form 2 at the point of exit and the asset will not be subject to GST. The lease payments received from the lessee will not be subject to GST. However, if the asset is located in Malaysia, the supply becomes a taxable supply and will be subject to GST at a standard rate. The lessor is also entitled to claim input tax credit in full if he makes taxable supplies.


Leasing from a Foreign Lessor 

13. If a foreign lessor leases an asset to a local company, is the lease subject to GST?

Yes, it is subject to GST. Where the leased asset is imported under the lessee’s name, the lessee has to pay GST upon importation. If the leased asset is used wholly in making taxable supplies, the lessee can claim input tax credit in full. If the leased asset is used partially to make taxable and exempt supplies, the lessee is entitled to claim input tax credit proportionately. .


Leasing to a Lessee Located In Designated Area

14. What is GST treatment on an operating lease contract made with a customer located in Langkawi?

If the leased asset is to be used in Langkawi, the supply of services by the lessor is a taxable supply. Hence, the monthly lease payments are subject to GST. 


Other Charges Relating to a Lease Contract 

15. In an operating lease, it is the lessor’s responsibility to maintain and insure the leased asset. These charges are bundled up in the leased payment and no separate charges are made. How do I charge GST?

The supply of maintenance services and general insurance coverage are taxable supplies and the charges are subject to GST at a standard rate whether there is a separate charge or a single charge. If these charges are bundled up in the lease payment, GST will be charged on the whole amount. 

16. What is the GST treatment on other lease charges such as administration fee, documentation or acceptance fee and transfer of title fee?

Administration fee, documentation or acceptance fee and transfer of title fee are all standard rated supplies and the lessor must charge GST on these fees. 

17. Is introducer fee (dealer’s commission) paid to agents or dealers subject to GST?

The agent or dealer providing introducer services to the lessor is a standard rated supply. Hence, they must charge GST on the introducer fee or commission earned by them. The lessor is entitled to claim input tax credit. 


The Lessee Defaults in Payment 

18. What happens if the lessee defaults in payment in an operating lease?

When the lessee defaults in the lease payment, the lessor must account and pay GST on the leased asset at the time when the supply is made. However, the lessor is entitled to bad debt relief six months after he had accounted for and paid GST provided all other conditions of a bad debt relief are satisfied. Please refer to the GST General Guide. 


Early Lease Termination

19. Should the lease be terminated prematurely, the lessee will be required to pay the whole amount outstanding to fulfill the lease agreement. Will GST be chargeable on the outstanding amount received even though no supply is made?

Yes, GST will be chargeable on the outstanding amount even though no supply has been made. 


Secondary Lease 

20. Secondary lease allows the lessee to continue the lease at a lower rate upon expiry of the first lease. Is GST imposed on the secondary lease?

Yes, the secondary lease will be subject to GST at a standard rate. 


Sub-lease 

21. What is the GST treatment when the leased asset is subleased?

The first lessor will charge GST on the leased asset. Subsequently, the second lessor will charge GST when he subleases the leased asset and claims input tax credit in full. 


Lease Rebate

22. The lessor usually gives a rebate to a lessee who has excellent payment record at the end of the leasing period. Is there a need to make a GST adjustment on the rebate given?

Yes, GST adjustment is needed. The effect is the same as issuing a credit note. 


Repossession of Leased Assets

23. What is the GST treatment on repossession of assets?

Where goods are supplied under a financial lease agreement, GST has been paid in full on the first supply. If the goods are subsequently repossessed and the lessor sells the repossessed assets, he charges GST on the sale and accounts GST as his output tax. If repossession services are used by the lessor and the repossessing agent is a GST registrant, he will charge GST on his repossession services. The lessor however can claim input tax credit for this. 


Shariah Advisory Services 

24. Is shariah advisory services under Ijarah financing subject to GST?

Generally any advisory service is subject to GST at 6%. However, under Islamic financing, it is a mandatory requirement to engage a shariah advisor to ensure adherence to Islamic principles. Hence, a shariah advisory service is not a supply.


Transitional Issues 

25. Is the lessor allowed to claim sales tax that he had paid on the purchase of an asset before the implementation of GST which he intends to lease after implementation of GST? 

No, the lessor cannot claim sales tax paid on the leased asset. 

26. My finance lease agreement is a non-reviewable agreement and it spans over the GST implementation date. Do I need to account for GST on the instalment payments for the period on and after GST is implemented?

No, you do not have to charge GST on the lease supplied on and after the date of implementation. 
 

 

 

 

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