Depreciating assets subject to hire purchase agreements
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For income tax purposes, certain hire purchase agreements entered into after 27 February 1998 are treated as a notional sale of goods by the financier (or hire purchase company) to the hirer, financed by a notional loan from the financier to the hirer.
Generally, the cost or value of the goods stated in the hire purchase agreement or the arm's length value is taken to be the cost of the goods to the hirer and the amount loaned by the financier to the hirer to buy the goods.
The hire purchase payments made by the hirer are separated into principal and interest, and the interest may be deductible to the hirer.
Under the UCA rules, if the goods are depreciating assets, the hirer is the holder if they:
- possess the assets or have a right to do so immediately, and
- have a right to become the legal owner and it is reasonable to expect that they will become the legal owner or that the assets will be disposed of for their benefit.
If these conditions are met the hirer is able to claim a deduction for decline in value to the extent that the assets are used for a taxable purpose, such as for producing assessable income.
If the hirer actually acquires the goods under the agreement, the hirer continues to be treated as the holder. Actual transfer of legal title to the goods from the financier to the hirer is not treated as a disposal or acquisition.
On the other hand, if the hirer does not legally acquire the goods under the arrangement, the goods are treated as being sold back to the financier at their market value at that time. The hirer will need to work out any assessable or deductible balancing adjustment amount - see What happens if you no longer hold or use a depreciating asset?
The notional loan amount under a hire purchase agreement is treated as limited recourse debt - see Limited recourse debt arrangements.
Last modified: 01 Oct 2006QC 27597