Tax Advisory for Second-Hand Vehicle Dealers: How to Account for GST?
As a business, it’s compulsory to register for GST when your taxable turnover exceeds $1 million. For second-hand vehicle dealers, ‘taxable turnover’ refers to the price of the vehicles sold in a year. As vehicles are high-value items, most, if not all, of the second-hand vehicle dealers are required to register for GST in Singapore. If you are a second-hand vehicle dealer, this article will help you understand the GST charges on your vehicles and what’s applicable for your business.
How is it Different for Second-Hand Vehicle Dealers?
For starters, a used motor vehicle that has been registered in Singapore is considered a second-hand vehicle. Used vehicles previously registered overseas are not counted. The calculation of GST differs for the sale of second-hand vehicles as compared to that of new vehicles.
In the case of second-hand dealers of motor vehicles, there are two industry-specific methods to charging GST.
1. Gross Margin Scheme
Different from the general rule that requires a GST-registered person to charge GST on the full value of the goods he sells, Gross Margin Scheme (GMS) is a special scheme that allows you to account GST only on the gross margin, which is the difference between the selling price and purchase price of the vehicle.
Gross Margin: selling price – purchase price
If you are in the business of selling used goods (including motor vehicles, jewellery, luxury watches etc), you can use the GMS if the goods were purchased free of GST, whether it’s from a non-GST registered business or another GST-registered supplier that has used the Gross Margin Scheme.
A possible scenario for some could be when your selling price is lower than or equal to the purchase price. In this instance, the gross margin will be treated as NIL and no GST will be charged. However, you will still have to report the selling price in the GST return.
Take note that under this scheme, the buyers of your used-vehicles are not allowed to claim input tax on the goods, even if they are GST-registered. Hence, the GST chargeable amount is not to be shown on the invoice issued to your customers.
Additionally, each sale is considered individually i.e. the loss from one sales transaction cannot be used to offset against the gross margin on another sales transaction for the purpose of determining the total GST (i.e. output tax) to be accounted for by the seller. In this case, the loss-making transaction will have its gross margin treated as NIL (no GST is charged) and the profit-making transaction will have the GST computed on the entire gross margin amount.
Again, take note that this scheme can only be applied for used vehicles purchased free of GST. To get started, you will have to apply for GMS by submitting the Self-review of Eligibility and Declaration on Use of Gross Margin Scheme Form to the Inland Revenue Authority of Singapore (IRAS). With IRAS’ approval, you can proceed to use the GMS from the date of submission of application moving forward as long as you meet the conditions of the Form.
2. Discounted Sale Price Scheme
On the other hand, if you have previously claimed GST on your vehicle purchase, you are not eligible for the Gross Margin Scheme. This is where Discounted Sale Price Scheme may be more applicable for you. If you are not a motor vehicle dealer and occasionally sell vehicles used by your business, you can also consider the Discounted Sale Price Scheme.
When selling a second-hand or used vehicle, you can charge GST on 50% of the selling price under the Discounted Sale Price Scheme. Take note that you won’t have to seek approval from the IRAS to use the scheme.
If you’re considering how this may influence your business, a key difference to your customers between this scheme and the Gross Margin Scheme above is that under this scheme, your customer who is GST-registered can claim the GST incurred if it is a commercial vehicle and if they meet the conditions for claiming input tax.
Let Us Do the Calculations for You
In a nutshell, second-hand vehicle dealers are required to account for GST in a different way than other businesses. If your taxable turnover has exceeded $1 million and it’s your first time registering for GST, the necessary paperwork and forms can be confusing. For this reason, there is more than one way that our experts at Chartsworth can assist you with your needs. For more information, discover how we can help you with your tax advisory services.