Private ruling: Asset Lease - Loan Agreement
Published: August 2013
Ruling period: Income year ended 30 June 2014 | Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ended 30 June 2018
Date scheme commenced: During the income year ended 30 June 2014.

Ruling: Q1: Will the lease for the asset be taken to have ended, pursuant to section 240-75 of the Income Tax Assessment Act 1997 (ITAA 1997), upon the transfer of title of the asset to the lessee and the termination of the lease on the delivery date? | A1: Yes. | Q2: Will the Loan Agreement (LA) to be entered into for the asset be considered as an extension or renewal of the lease for the asset under section 240-80 of ITAA 1997? | A2: No. | Q3: Will the lessee have an obligation to withhold, pursuant to section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), an amount from interest payable under the LA to be entered into for the asset? | A3: No. | Q4: Will the lessee be entitled to a deduction under section 25-25 of the ITAA 1997 over the period of the LA for the following expenditure: · the up-front fee payable under the LA for the asset, · the reimbursement of the lessor's legal expenses payable under the LA for the asset, and · legal expenses payable by the lessee in connection with the negotiation, preparation, execution and completion of the LA for the asset? | A4: Yes.

Relevant facts and circumstances: Background The lessor is a limited liability company incorporated under foreign country law. The lessor is a company undertaking the hire purchase arrangement (HP) with the lessee, the terms and conditions of which are set out in the lease for the asset. As part of the financing of the asset, the lessor had raised traditional debt sourced from lenders. Under each loan, the lessor has an effectively non-contingent obligation to repay the debt, with interest, that is not contingent on any event, condition or situation, other than the ability or willingness of the lessor to meet the obligation. The lenders are recognised entities. The lessor is a resident of foreign country for the purpose of Article 4 of the Convention between Australia and foreign country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, and Protocol [2008] ATS 21). The lessor, under the laws of foreign country, is liable to tax in foreign country. The lessor does not have a fixed place of business in Australia through which the business of the enterprise is wholly or partly carried on for the purpose of Article 5(1) of the foreign country convention. The lessor does not have a person acting on behalf of it in Australia which has the authority to negotiate or conclude contracts on behalf of the lessor. The Proposed Transaction 1. The lessee will exercise its rights pursuant to the lease to purchase the asset on the purchase date (also the delivery date). 2. The lessee and lessor, among others, will enter into the Deed whereby, among other things, on the purchase date the lessee will pay to the lessor the purchase price and all other amounts then due and payable by the lessee under the lease (other than the additional purchase price), the lease will be terminated and title to the asset will be transferred from the lessor to the lessee. 3. The lessor and lessee will enter into the LA whereby the additional purchase price shall be payable by the lessee to the lessor in instalments pursuant to the terms thereof. The lessor and lessee are unrelated to each other. The lessor will be wholly owned by a foreign country resident company with at least 50% of its shares owned directly or indirectly by foreign country resident individuals. The LA The LA represents a four year, unsecured, fully amortising, fixed rate loan. The LA is to commence on the delivery date. Under the LA the lessee is required to pay the lessor a non-refundable up-front fee. The lessee is also required to reimburse the lessor for legal expenses in connection with the negotiation, preparation, execution and completion of the LA for the asset. The lessee will also incur legal expenses in connection with the negotiation, preparation, execution and completion of the LA for the asset. The lessee is not aware of the lessor having sought consent to carry on any other business other than financing contemplated and resulting from the LA. Interest paid to the lessor under the LA is not paid as part of an arrangement involving back-to-back loans for the purposes of Article 11(3)(b) of the foreign country convention. The LA will be entered into on commercially agreed terms which are negotiated on an arm's length basis.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 25-25 | Income Tax Assessment Act 1997 Section 240-75 | Income Tax Assessment Act 1997 Section 240-80 | Taxation Administration Act 1953 Schedule 1 Section 12-245

Reasons for decision: Summary: The scheme of the provisions contained in Division 240 of the ITAA 1997 is to treat some arrangements (such as hire purchase agreements) as a sale of property to the notional buyer (hirer) together with a loan from the notional seller (supplier of the good) to the notional buyer. Subdivision 240-F of the ITAA 1997 outlines when an arrangement ends and its consequential effects. An arrangement to which Division 240 of the ITAA 1997 applies is taken to have ended if, among other things, the arrangement is: (a) stated to cease to have effect at a particular time or the time at which the arrangement ceases to have effect (whether because the arrangement is terminated or for any other reason), whichever is sooner (subsection 240-75(1) of the ITAA 1997); or (b) extended or renewed (subsection 240-75(2) of the ITAA 1997). In addition, subsection 240-75(4) of the ITAA 1997 provides that an arrangement is taken to have ended if it is reasonable to conclude, having regard to the terms and conditions of the arrangement, that the arrangement has ceased to have effect. Having regard to the facts of the arrangement, it is considered that the lease for the asset is taken to have ended under section 240-75 of the ITAA upon the transfer of title of the asset to the lessee and the termination of the lease, which occurs on the delivery date. Section 240-80 of the ITAA 1997 outlines what happens if an arrangement to which Division 240 of the ITAA 1997 applies is extended or renewed. From Question 1 the lease is no longer a HP for the purposes of Division 240 of the ITAA 1997 upon transfer of title to the asset to the lessee and the termination of the lease, which occurs on the delivery date. Although the LA to be entered into by the lessee and the lessor will commence on the delivery date the LA is considered to be a new arrangement between the lessee and the lessor and not an extension or renewal of the existing lease under section 240-80 of the ITAA 1997. Section 12-245 of Schedule 1 to the TAA 1953 imposes an obligation to withhold tax on interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)) that an entity pays to a recipient who has an address outside Australia. However, section 12-300 of Schedule 1 to the TAA 1953 provides that an entity is not required to withhold an amount under Subdivision 12-F of Schedule 1 to the TAA 1953 if no withholding tax is payable in respect of the interest. | Detailed Reasoning - Interest withholding tax: Under the LA the lessee is liable to pay interest to the lessor. As the lessor is not a resident of Australia for income tax purposes the lessor is liable to interest withholding tax under subsection 128B(5) of the ITAA 1936 unless an exemption is available to the lessor under the foreign country convention. | Detailed Reasoning - Exemption from interest withholding tax: The foreign country convention applies to withholding tax on income derived on or after 1 January 2009. Article 11(3) of the foreign country convention provides an exemption from interest withholding tax in this instance, if the lessor, being a foreign country resident: 1. is classified as a financial institution under Article 11(3)(b) of the foreign country convention; 2. beneficially owns the interest as required by Article 11(3) of the foreign country convention (also refer Article 11(9) of the foreign country convention); and 3. is unrelated to and dealing wholly independently with the payer of the interest, as required by Article 11(3)(b) of the foreign country convention, and the interest arising in Australia is not: 4. effectively connected with a permanent establishment in Australia of the lessor as required by Article 11(6) of the 2008 foreign country convention; nor 5. paid as part of an arrangement involving 'back to back' loans as required by Article 11(4) of the 2008 foreign country convention, and 6. satisfies the Limitation On Benefits article contained in Article 23 of the foreign country convention. Having regard to the facts of the arrangement the exemption from interest withholding tax under the foreign country convention applies to the lessor. Accordingly, the lessee is not required to withhold, pursuant to section 12-245 of Schedule 1 to the TAA 1953, an amount from interest payable under the LA to the lessor. | Detailed Reasoning - Question 4: Subsection 25-25(1) of the ITAA 1997 states: You can deduct expenditure you incur for *borrowing money, to the extent that you use the money for the *purpose of producing assessable income. In most cases the deduction is spread over the period of the loan. The term borrowing is defined in subsection 995-1(1) of the ITAA 1997 to mean: …any form of borrowing, whether secured or unsecured, and includes the raising of funds by the issue of a bond, debenture, discounted security or other document evidencing indebtedness. As the LA represents a four year, unsecured, fully amortising, fixed rate loan it will be a borrowing as the term is defined. The lessee will incur the following expenditure in respect of its borrowing under the LA: · the up-front fee payable under the LA for the asset, · the reimbursement of the lessor's legal expenses payable under the LA for the asset, and · legal expenses payable by the lessee in connection with the negotiation, preparation, execution and completion of the LA for the asset. It is considered that the above expenditure is expenditure the lessee incurs for 'borrowing money'. The term 'purpose of producing assessable income' is defined in subsection 995-1(1) of the ITAA 1997 to mean: something is done for the purpose of producing assessable income if it is done: (a) for the purpose of gaining or producing assessable income; or (b) in carrying on a * business for the purpose of gaining or producing assessable income. As the lessee intends to use the money borrowed under the LA to finance the acquisition of the asset as part of carrying on its business the 'purpose of producing assessable income' is satisfied. The period of the borrowing under the LA is four years from the delivery date in accordance with subsection 25-25(5) of the ITAA 1997. In view of the above, the lessee will be entitled to a deduction under section 25-25 of the ITAA 1997 for the abovementioned expenditure over the period of the borrowing under the LA.