ATO ID 2005/263: Deemed interest in respect of a hire purchase agreement for non-resident interest withholding tax purposes
Date of decision: 7 December 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Where both Division 240 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 128AC of the Income Tax Assessment Act 1936 (ITAA 1936) apply to an arrangement entered into by the taxpayer, is the notional interest for an arrangement payment determined under Division 240 relevant for determining the notional interest for an attributable agreement payment for the purposes of the interest withholding tax provision in section 128AC?

Decision
No. The notional payments determined under Division 240 of the ITAA 1997 would not be relevant for the purposes of section 128AC of the ITAA 1936. The implicit interest component of actual rental payments made, or liable to be made, under the hire purchase agreement will be determined according to the requirements of section 128AC.

Facts
The taxpayer is a resident of Australia for tax purposes. In July 2003, the taxpayer entered into an agreement with a non-resident plant supplier for plant used by the taxpayer in carrying on a business for the purpose of producing assessable income. The agreement conferred upon the taxpayer a right to use and possess the plant, and an option to purchase the plant at the end of the term of the agreement. On the facts of the case: The plant supplier has an address outside Australia.

Reasons for decision
Summary: In the present case both Division 240 of the ITAA 1997 and section 128AC of the ITAA 1936 applied to the arrangement between the taxpayer and the non-resident plant supplier. Division 240 of the ITAA 1997 has no effect for the purposes of Division 11A of Part III of the ITAA 1936 (paragraph 240-15(b) of the ITAA 1997). Hence, the implicit interest component of actual rental payments made, or liable to be made, under the hire purchase agreement would be determined according to the requirements of section 128AC of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1997 Division 240 paragraph 240-15(b) subsection 995-1(1)
Related public rulings and determinations: Taxation Ruling TR 98/21
Subject references: Cross border leasing Hire purchase Lease & hire income Non resident interest withholding tax