ATO ID 2001/60: Leasing of mining equipment: Whether a 'Qualifying Arrangement'
Date of decision: 6 November 1998
Business line: Public Groups and International

Issue
Whether a lease of mining equipment by an Australian entity to an overseas mining company can be characterised as a 'qualifying arrangement' under Division 16D of the Income Tax Assessment Act 1936(ITAA 1936). If so, whether the Commissioner of Taxation will exercise his discretion under subsection 159GG(4), in favour of the taxpayer, to treat the lease as a 'non-qualifying' arrangement.

Decision
Yes. The arrangement would be characterised as a 'qualifying arrangement' under Division 16D of the Income Tax Assessment Act 1936 . However, the Commissioner of Taxation would not exercise his discretion in favour of the taxpayer under subsection 159GG(4).

Facts
An Australian entity leases equipment to an overseas mining company. The equipment is to be used in the company's mining operations. The lessor proposes to enter into an arm's length residual value put option for a guaranteed residual value amount payable on termination of the lease.

Reasons for decision
Summary: Where an arrangement is found to be a 'qualifying arrangement' then for the purposes of calculating the taxable income of a lessor, such a lease will be treated as though it were a loan by the lessor to enable the lessee to acquire the leased property. Effectively this means those tax deductions for the cost of, or capital expenditure incurred on, the leased property (other than interest payments on funds borrowed to fund the acquisition) will not be deductible to the lessor. Section 159GG (Division 16D of the Income Tax Assessment Act 1936 ) prescribes a number of tests to determine whether an arrangement is a 'qualifying arrangement'. Note that if any of the conditions listed in section 159GG are satisfied then the arrangement will be a 'qualifying arrangement'. In this particular case, the following factors indicate that the arrangement is a 'qualifying arrangement' for section 159GG purposes Subsection 159GG(4) of the Income Tax Assessment Act 1936 provides the Commissioner of Taxation with a discretion to treat an otherwise 'qualifying arrangement' as a 'non-qualifying arrangement'. Based on the facts it is not considered that this discretion should be exercised given that the effect of the arrangement is to effect a transfer of the risk of ownership with a consequent benefit to the lessee in a reduction in the charge for use of the equipment.

Legislative references: Income Tax Assessment Act 1936 Division 16D Section 159GG subparagraph 159GG(1)(a)(i) subparagraph 159GG(1)(a)(iv) subparagraph 159GG(1)(b)(ii) paragraph 159GG(1)(c) subsection 159GG(4)
Subject references: Lease financing Lease residual values Associated persons Repairs and maintenance expenses