ATO ID 2003/462: Capital Allowances: 'arrangement payments' under a hire purchase agreement
Date of decision: 11 June 2003
Year of income: Year ended 30 June 2001 Year ended 30 June 2000 Year ended 30 June 1999
Business line: Public Groups and International

Issue
Are 'arrangement payments' made by the notional buyer under the hire purchase agreement deductible under Division 240 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The 'arrangement payments' made by the notional buyer under the hire purchase agreement are not deductible under Division 240 of the ITAA 1997.

Facts
The taxpayer entered into an arrangement that was a hire purchase agreement with a finance provider, a Bank, for plant used by the taxpayer in carrying on a business for the purpose of producing assessable income. The term of the hire purchase agreement was for 60 months. The hire purchase agreement was terminated early. The Bank repossessed the plant and advised the taxpayer of the amount outstanding under the hire purchase agreement. The taxpayer did not extend or renew the agreement nor reacquire the plant. The taxpayer disputed the amount advised as outstanding. Under a negotiated settlement the taxpayer paid the Bank a settlement payment comprised of a payment and the return of the plant.

Reasons for decision
Summary: Division 240 of the ITAA 1997 deals with hire purchase agreements as defined in subsection 995-1(1) of the ITAA 1997. The broad scheme of the Division is to treat such hire purchase agreements as a sale of the relevant goods to the hirer (notional buyer) combined with a loan from the supplier (notional seller) to the notional buyer. The taxpayer was the notional buyer and the Bank was the notional seller under the hire purchase agreement (section 240-17 of the ITAA 1997). The hire purchase agreement ended when the plant was repossessed (section 240-75 of the ITAA 1997). Section 240-65 of the ITAA 1997 gives the meaning of 'arrangement payment' as an amount that the notional buyer is required to pay under the hire purchase agreement, but does not include a termination amount. The phrase 'an amount that a notional buyer is required to pay under the arrangement' in section 240-65 of the ITAA 1997 means an amount paid or liable to be paid, under the terms and conditions of the hire purchase agreement, as consideration for the use or the control of use of the property subject to the hire purchase agreement, or as consideration for any other rights in relation to the property. Both the instalments the taxpayer paid prior to repossession and the settlement payment made by the taxpayer in satisfaction of obligations under the hire purchase agreement, are 'arrangement payments' because they are required to be paid under the terms and conditions in the hire purchase agreement, and were not termination amounts. Section 240-55 of the ITAA 1997 provides that a notional buyer cannot deduct arrangement payments it makes under a hire purchase agreement. Arrangement payments are taken into account in calculating notional interest that may be deducted under section 240-50 of the ITAA 1997. Subsection 240-7(4) of the ITAA 1997 also clarifies that the arrangement payments, as actual payments made to the notional seller, are not deductible to the notional buyer. Therefore, the 'arrangement payments' made by the notional buyer under the hire purchase agreement are not deductible under Division 240 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 240-7(4) section 240-17 section 240-50 section 240-55 section 240-65 section 240-75 subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2003/463 | ATO ID 2003/464
Subject references: Capital Allowances CoE Lease & hire expenses Hire purchase