ATO ID 2003/1197: Division 240: deductibility of 'notional interest' to the notional buyer under a hire purchase agreement
Date of decision: 22 December 2003
Year of income: Year ended 30 June 2001 Year ended 30 June 2000
Business line: Private Groups and High Wealth Individuals

Issue
Is the taxpayer, the notional buyer under a hire purchase agreement to which Division 240 of the Income Tax Assessment Act 1997 (ITAA 1997) applies, entitled to deduct 'notional interest' under section 240-50 of the ITAA 1997?

Decision
Yes. The taxpayer, as the notional buyer under the hire purchase agreement, is entitled to deduct 'notional interest' for an income year to the extent that the taxpayer would, apart from Division 240 of the ITAA 1997, have been entitled to deduct 'arrangement payments' for that income year if no part of those payments were capital in nature.

Facts
In January 2000, the taxpayer entered into an arrangement with a plant supplier for plant used by the taxpayer in carrying on a business for the purpose of producing assessable income. The arrangement conferred upon the taxpayer an option to purchase a plant. It was reasonably likely that the option to purchase would be exercised by, or in respect of, the taxpayer. The term of the hire purchase agreement was 48 months with an option to terminate early. The agreement was terminated at the end of 18 months. The taxpayer acquired the plant at the end of the 18 months.

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) entered into after 27 February 1998. 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' as the taxpayer was a party to the arrangement and under the arrangement, the taxpayer had the right to use the plant on hire (subsection 240-17(2) of the ITAA 1997). Section 240-55 of the ITAA 1997 provides that a notional buyer cannot deduct 'arrangement payments' (as defined in section 240-65 of the ITAA 1997) that the notional buyer makes under the arrangement, but those payments are taken into account in calculating 'notional interest' (as prescribed by section 240-60 of the ITAA 1997) that may be deducted under section 240-50 of the ITAA 1997. Subsection 240-50(1) of the ITAA 1997 provides that a notional buyer is only entitled to deduct notional interest for an income year to the extent that the notional buyer would, apart from Division 240 of the ITAA 1997, have been entitled to deduct arrangement payments for that income year if no part of those payments were capital in nature. Accordingly, the taxpayer, as the notional buyer under a hire purchase agreement to which Division 240 of the ITAA 1997 applies, is entitled to deduct 'notional interest' calculated as prescribed by section 240-60 of the ITAA 1997 to the extent that the relevant goods are used for the purpose of producing assessable income.

Legislative references: Income Tax Assessment Act 1997 Division 240 subsection 240-17(2) section 240-50 section 240-55 section 240-60 section 240-65 subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2003/462 | ATO ID 2003/1196 | ATO ID 2003/1198
Subject references: Hire purchase Lease & hire expenses