ATO ID 2002/1083: Division 40: taxable purpose - commercial leasing
Date of decision: 12 July 2002
Year of income: 2000
Business line: Public Groups and International

Issue
Does the leasing of depreciating assets held by a partnership constitute use for a taxable purpose under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes, the leasing partnership will use the assets for a taxable purpose by entering into a lease agreement which provides for the receipt of a stream of assessable rental payments.

Facts
A partnership purchased various depreciating assets under a manufacture and supply agreement. It immediately leased the assets on commercial terms to an unrelated entity that had been awarded a franchise by another unrelated entity to operate a business in which the assets are used. Under the lease agreement, the lessee is required to make quarterly payments of rent to the leasing partnership for use of the assets.

Reasons for decision
Summary: A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). Something is done for the purpose of producing assessable income if it is done for the purpose of gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income (subsection 995-1(1) of the ITAA 1997). The lease agreement provides that the lessee must make quarterly payments of rent to the lessor for use of the depreciating assets. Lease rental payments received by the leasing partnership from the lessee in these circumstances are assessable income of the leasing partnership. Use by the leasing partnership for this purpose constitutes use for a taxable purpose.

Legislative references: Income Tax Assessment Act 1997 subsection 40-25(7)
Subject references: Depreciating asset Division 40 Partnership asset Taxable purpose