ATO ID 2011/72: Small Business Entities: depreciating Asset Lease or Short-Term Hire Agreement
Date of decision: 11 April 2011
Year of income: Year ended 30 June 2010
Business line: Private Groups and High Wealth Individuals

Issue
Is the hiring out of a depreciating asset by a Small Business Entity taxpayer to an unrelated entity for a total period of hire of nine weeks including extensions of the initial term, considered to be a 'depreciating asset lease' for the purposes of subsection 328-175(6) of the Income Tax Assessment Act 1997 ?

Decision
No. The hiring out of a depreciating asset by a Small Business Entity taxpayer to an unrelated entity for a total period of hire of nine weeks including extensions of the initial term, is not considered to be a 'depreciating asset lease' as the hiring out is a 'short-term hire agreement' as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 .

Facts
All legislative references are to the Income Tax Assessment Act 1997 unless expressed otherwise. The taxpayer is a Small Business Entity (SBE) within the meaning prescribed by section 328-110. The taxpayer carries on a business of hiring scaffolding to the commercial construction industry. The scaffolding is a depreciating asset within the meaning of that term in section 40-30. The taxpayer entered a hire agreement to hire scaffolding to an unrelated entity (the customer) for a period of four weeks for a set weekly hire fee for a particular construction project. The parties agreed to the following additional periods of hire: There was no further agreement for hire of the same scaffolding to the customer or a related entity of the customer.

Reasons for decision
Summary: SBE taxpayers may choose to apply Subdivision 328-D for calculating deductions for depreciating assets if they satisfy the requirements of section 328-175. Certain types of depreciating assets are specifically excluded from Subdivision 328-D. One exclusion is where a depreciating asset is being let, or might reasonably be expected to be let predominantly on a 'depreciating asset lease' (subsection 328-175(6)). A 'depreciating asset lease' is defined in subsection 995-1(1) and does not include a 'short-term hire agreement'. Accordingly, if a depreciating asset is hired out under a short-term hire agreement, subsection 328-175(6) does not operate to exclude the taxpayer from choosing to apply Subdivision 328-D in respect of that asset. The term 'short-term hire agreement' is defined in subsection 995-1(1) as follows: A short-term hire agreement is an agreement for the intermittent hire of an asset on an hourly, daily, weekly or monthly basis. However, an agreement for the hire of an asset is not a short-term hire agreement if, having regard to any other agreements for the hire of the same asset to the same entity or an *associate of that entity, there is a substantial continuity of hiring so that the agreements together are for longer than a short-term basis. In this instance, there is an agreement for the intermittent hire of scaffolding on a weekly basis for an initial period of four weeks. However, a further four week and one week period of hire were agreed to in succession. The definition of the term 'short-term hire agreement' excludes an agreement where, having regard to any other agreements for the hire of the same asset to the same entity or an associate of that entity, there is a substantial continuity of hiring so that the agreements together are for longer than a short-term basis. As it is not sufficiently clear what is a short-term basis or a substantial continuity of hiring, extrinsic materials may be referred to. The Explanatory Memorandum to the New Business Tax System (Simplified Tax System) Act 2001 (the Explanatory Memorandum) introduced Division 328 in respect of the simplified tax system. While Division 328 has been updated to refer to SBE taxpayers, the Explanatory Memorandum is still relevant in considering the interpretation of the exclusion to a 'short-term hire agreement'. The Explanatory Memorandum states: 5.26 ...Short-term hirings of the same asset to the same entity, or associates of that entity, will not be regarded as a short-term hire agreement if they are reasonably continuous and total a period longer than a few months. The defined term, 'short-term hire agreement', is also used in Division 242 in respect of leases of luxury cars. Schedule 2E of the Income Tax Assessment Act 1936 (ITAA 1936) was the predecessor to Division 242 and it specifically stated in section 42A-125 of Schedule 2E of the ITAA 1936 that consecutive short-term hire agreements should not exceed 6 months. When Division 242 replaced Schedule 2E of the ITAA 1936, section 42A-125 was removed. However, paragraph 4.41 of the Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Act 2010 which introduced Division 242 states: 4.41 The Schedule 2E definition of 'short-term hire agreement' relies, in part, on the rule in section 42A-125 about treating consecutive short-term hiring agreements as leases. The existing definition of 'short-term hire agreement' in the ITAA 1997 already broadly captures that idea, so section 42A-125 is omitted. A small difference is that section 42A-125 applies to consecutive periods totalling over six months, while the ITAA 1997 definition refers to agreements that add up to 'longer than a short term basis'. The explanatory memorandum that added that definition referred to that period as being 'longer than a few months' (see paragraph 5.26 of the explanatory memorandum to the New Business Tax System (Simplified Tax System) Bill 2000), so the two ideas are substantially the same. Unless the circumstances indicate otherwise, it will be accepted that an agreement for the intermittent hire of an asset; or a succession of agreements for hire of the same asset to the same entity or an associate of that entity, that does not exceed 6 months in total will be considered a 'short-term hire agreement' as defined in subsection 995-1(1). In the present instance, the taxpayer and customer agreed to a weekly hire for an initial four week period followed by an additional four weeks and then one week. Having regard to these agreements, it is considered that the hiring out of the scaffolding for a total period of 9 weeks does not amount to a substantial continuity of hiring and therefore will be a short-term hire agreement. In these circumstances, the hiring out of the scaffolding by the taxpayer is not a 'depreciating asset lease' for the purposes of subsection 328-175(6).

Legislative references: Income Tax Assessment Act 1997 section 40-30 Division 242 Division 328 Subdivision 328-D section 328-110 section 328-175 subsection 328-175(6) subsection 995-1(1)
Other references: Explanatory Memorandum to New Business Tax System (Simplified Tax System ) Act 2001 Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Act 2010
Subject references: Depreciating asset Depreciating asset lease