ATO ID 2003/464: Capital Allowances: termination amount when a hire purchase agreement ends
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
Where property the subject of a hire purchase agreement is to be returned to the notional buyer, is the value of the property at the end of the hire purchase agreement included as a termination amount under section 240-78 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The value of the returned property at the end of the hire purchase agreement is included as a termination amount for the purposes of section 240-78 of the ITAA 1997. The value included is the market value of the property at the time when the hire purchase agreement ends.

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 which 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 240-78 of the ITAA 1997 gives the meaning of termination amount as an amount payable because the hire purchase agreement ends. Where paragraph 240-78(c) of the ITAA 1997 applies, a termination amount includes the market value of the property at the end of the hire purchase agreement. That paragraph covers situations where property is returned to the notional seller as a form of payment towards the outstanding debt when the hire purchase agreement is terminated early, such as pursuant to repossession. It should be noted that paragraph 240-65(b) of the ITAA 1997 provides, that an arrangement payment does not include a termination amount as defined in section 240-78 of the ITAA 1997. Accordingly, the value of the returned property at the end of the hire purchase agreement is included as a termination amount for the purposes of section 240-78 of the ITAA 1997. The value included is the market value of the property at the time when the hire purchase agreement ends.

Legislative references: Income Tax Assessment Act 1997 subsection 240-17 paragraph 240-65(b) subsection 240-75 section 240-78 paragraph 240-78(c) subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2003/462 | ATO ID 2003/463
Subject references: Capital Allowances CoE Hire purchase Lease & hire expenses