ATO ID 2012/80: Hire purchase agreement: holder of an asset
Date of decision: 20 September 2012
Year of income: year ended 30 June 2012
Business line: Public Groups and International

Issue
Upon entering into an arrangement for the term purchase of a depreciating asset, which provides the purchaser with a right to sell the asset to the owner (or an entity nominated by the owner) at a predetermined price at the end of the term of the arrangement, does the purchaser start to hold the asset under Item 6 of the table in section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Upon entering into the arrangement for the term purchase of a depreciating asset, which provides the purchaser with a right to sell the asset to the owner (or an entity nominated by the owner) at a predetermined price at the end of the term of the arrangement, the purchaser starts to hold the asset under Item 6 of the table in section 40-40 of the ITAA 1997.

Facts
The purchaser enters into an arrangement for the purchase by instalments of a depreciating asset. Under the arrangement, the asset remains the property of the owner (the legal owner) until all the payment obligations of the term purchase are met. Other relevant features of the arrangement include the following:

Reasons for decision
Summary: Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset a taxpayer holds to the extent the asset is used for a taxable purpose (section 40-25 of the ITAA 1997). The table in section 40-40 of the ITAA 1997 identifies the holder of a depreciating asset in any particular circumstance. The basic (or default) rule is that the taxpayer holds the asset if they are the owner (the legal owner) of the asset (Item 10 of the table in section 40-40 of ITAA 1997). However, there are items that identify a holder in various other circumstances even though they are not the asset's owner. One of these circumstances is contained in Item 6 of the table in section 40-40 of the ITAA 1997 and applies where: During the term of this arrangement, the purchaser will possess the asset and has the right to become its legal owner upon meeting all the payment obligations of the term purchase arrangement. Where the right to sell is exercised, the asset is disposed of at the direction of the purchaser and the disposal will benefit the purchaser in meeting their final payment obligations under the arrangement. The purchaser will also become the legal holder of the asset for the instant in time before the asset is transferred to the nominated party who subsequently acquires the asset. Where the right to sell is not exercised, the purchaser will become the legal owner upon meeting its final payment obligations. Irrespective of whether the right to sell is exercised, the purchaser will become the legal owner of the asset (albeit only for an instant where the purchaser decides to exercise the right to sell) when the purchaser completes its payment obligations under the terms of the agreement. It is also reasonable to expect that the purchaser will complete its payment obligations under the arrangement because its payment obligations are unconditional and absolute and the owner can be expected to pursue the payment of debts incurred by the purchaser under these arrangements. Consequently, the tests contained in Item 6 of the table in section 40-40 of the ITAA 1997 are satisfied by the purchaser upon entering into the arrangements set out above for the purchase of the depreciating asset. Upon entering into the arrangement, the asset stops being held by the owner and starts to be held by the purchaser.

Legislative references: Income Tax Assessment Act 1997 Division 40 section 40-25 Item 6 of the table in section 40-40 Item 10 of the table in section 40-40
Subject references: Decline in value Economic Holder Hold a depreciating asset Lease financing Reasonable to expect Uniform capital allowances system