Private ruling: Lease
Published: January 2012
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the lease an operating lease? | A1: Yes. | Q2: Does Division 240 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the lease? | A2: No.

Relevant facts and circumstances: A lease will be entered into by the lessor and it's customers from time to time (as lessee). The leased assets are a particular item (assets). The lessees will use the assets entirely in their businesses. The lessees will be responsible for maintaining any substantial equipment at their own expense in relation to the use of the assets. The lessees will also be responsible for all repairs and maintenance of any assets under the lease. The lessor, with the consent of the lessees, will provide insurance cover for the assets. At all times during the term of the lease, full legal title to the assets will remain with the lessor, notwithstanding the delivery of the assets to, and the possession and use of the assets by, the lessee. The lessees have no interest in the assets other than as bailee. The lessees must fix and maintain durable labels in a prominent position on the asset stating that they are owned or supplied by the lessor. The lessees must pay consecutive monthly payments for rent. Rental payments are negotiated on an arm's length basis with reference to normal commercial terms and reflect the market value for assets of the nature of the assets leased in the current economic environment. The lease contains no option or obligation to purchase the assets at the end of the lease or on termination. The term of the lease will generally be 2-3 years. At the end of the lease: · the lessee must pay any outstanding rent to the lessor; however, the lessor is not entitled to any payment from the lessee for the residual value of any of the assets · the lessee must deliver all of the assets to the lessor as the lessor directs; and · the lessor need not account to the lessee for any money received by the lessor in respect of any subsequent sale, disposal, lease or other dealing by the lessor with any of the assets. The lessor may enter the place where the assets are and take possession of the assets without prior notice to the lessee if the assets are not returned when required to be returned.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 240.

Reasons for decision: Summary: Leases are agreements conveying the right from lessor to lessee to use property for a stated period of time in return for a series of payments. They include contracts for the hire of an asset which give the person hiring the asset the option to purchase it (hire-purchase agreements). In an operating lease, the risks and rewards that are incidental to ownership are not substantially transferred to the lessee as they remain with the lessor. However, in a finance lease, substantially all the risks and rewards are transferred to the lessee. In your case the lessee: · has no option at the end of the lease to purchase the assets · must deliver all assets to the lessor upon expiration of the lease · must pay consecutive monthly payments for rent · is responsible for all repairs and maintenance of any assets under the lease · has no interest in the assets other than for business purposes; and · must fix and maintain durable labels in a prominent position on the asset stating that they are owned or supplied by the lessor. and the lessor: · is not entitled to any payment for the residual value of any of the assets · provides insurance cover for the assets (with the lessee's consent) · may enter the place where the assets are and take possession of the assets without prior notice to the lessee if the assets are not returned when required to be returned · need not account to the lessee for any money received in respect of any subsequent sale, disposal, lease or other dealing with any of the assets. From the above information it is considered that the risks and rewards remain with the lessor. Therefore this lease is considered an operating lease. Section 240-10 of the ITAA 1997 states an arrangement is treated as a notional sale and notional loan if: (a) the arrangement is listed in the table below; and (b) the arrangement relates to the kind of property listed in the table; and (c) any conditions listed in the table are satisfied. This Division applies to: Arrangements of this kind That relate to this kind of property If these conditions are satisfied Special Provisions Hire purchase agreement Any goods None See Subdivision 240-1 Subsection 995-1(1) of the ITAA 1997 states the definition of 'hire purchase agreement' to mean: (a) a contract for the hire of goods where: i the hirer has the right, obligation or contingent obligation to buy the goods; and (note: an example of a contingent obligation is a put option) ii the change that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or the exercise an option to do so), exceeds the price of the goods; and iii title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised; or (b) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid. In your case the lease agreement does not meet the definition of a hire purchase agreement as the lessee does not have the right, obligation or contingent obligation to buy the goods, nor is it an agreement for the purchase of goods by instalments. As the definition of hire purchase agreement is not met, Division 240 of the ITAA 1997 does not apply to your circumstances.

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