Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 8 - Depreciation of lessor's fixtures
8.1 Part 1 of Schedule 8 of the Bill will amend Subdivision A, Division 3, Part III of the Income Tax Assessment Act 1936 (the Act) to give lessors entitlement to taxation depreciation allowances in respect of leased chattels that become a fixture on another person's land in circumstances where they would otherwise be so entitled had the leased item continued to be a chattel and not a fixture.
8.2 The amendments will treat a lessor of depreciable plant or articles under a chattel lease as the owner entitled to depreciation allowances where the plant etc is a fixture on another person's land, provided the lessor has an effective right to remove the property on default by the lessee or on termination of the lease.
8.3 The amendments will apply in the following circumstances:
- a taxpayer (the lessor) enters into a lease arrangement (not being a hire-purchase agreement or lease of realty) with another person (the lessee) under which a right to use depreciable property is granted to the lessee;
- the property is a fixture on the land of a person other than the lessor;
- but for being a fixture, the lessor would be the owner of the property within the meaning of section 54 of the Act; and
- where these circumstances apply, the lessor will be taken to be the owner of the leased property for the purpose of applying the depreciation provisions of the Act, instead of any other person. However, the lessor will not be treated as the owner unless there is an effective right to recover the property or if the lessor's ownership of the property derives from a sale and lease back of the property by the lessee.
Date of effect
8.4 The amendments apply to depreciable plant and equipment first used on or after 1 July 1996 for the purposes of producing assessable income of the lessor.
8.5 Under section 54 of the Act, entitlements to taxation depreciation allowances accrue to the person who owns and uses a depreciable unit of property comprising plant or articles to the extent that the unit is used (or installed ready for use) in deriving assessable income.
8.6 Within that framework, taxpayers who own and lease moveable plant (referred to as chattels) to others for reward generally are entitled to deduct the cost of the plant by way of depreciation allowances over its effective life.
8.7 In certain circumstances, however, leased property may become fixtures attached to land so as to become, at law, part of the land. Generally, only the owner of the land is the owner of fixtures on that land, including leased items. Accordingly, a lessor strictly speaking may not be entitled to depreciation allowances in respect of income producing property that becomes a fixture on another person's land.
The basic rule
8.8 Where the conditions expressed in paragraph 3 are satisfied, the lessor of leased property which is a fixture on another person's land is to be treated as the owner of the property entitled to depreciation allowances instead of any other person who, at law, may be the owner of the property. That rule applies to plant or articles within the meaning of section 54 which, if they were not fixtures, would be chattels owned by the lessor, including plant or articles affixed to land under a Crown lease. [New subsections 54AB(1) and (2)]
Eligible lessor - right of removal of property
8.9 However, a lessor will not be treated as the owner of leased fixtures unless there is an effective right to recover the property in the event of default by the lessee or on expiry or termination of the lease. New section 54AC specifies the circumstances in which such rights obtain.
8.10 For example, where the lessee of the property is the owner of the land on which the property is affixed, the lessor will be treated as having a right to remove the property if the lessor is authorised to sever and remove the leased property under specified conditions of default or on termination of the lease, provided the right to remove the property is able to be exercised without substantial damage to the land (including buildings) or the property itself. [New subsection 54AC(1)]
8.11 Where the leased property in question is a fixture on land not owned by the lessee, the lessor will be treated as having an effective right to remove the property if the lessee has a right to sever and remove the property from the land owner's premises, the lease provides the lessor with a right to recover the property as against the lessee, and the right to remove the property is able to be exercised without substantial damage to the land (including buildings) or the property itself. [New subsection 54AC(2)]
8.12 Where a lessor of property that is a fixture on another person's land has been treated as the owner of that property, the lessor will cease to be treated as the owner in the following circumstances:
- the lease expires or is otherwise terminated without the lessor exercising any right to recover the property;
- there is an event of default under the lease and the lessor ceases to have a right to recover the property (e.g. because there is a change in ownership of the land, or the lessee of the property ceases to have an interest in the land);
- the lessor disposes of his or her interest in the lease including the residual interest in the property;
- all of the lessee's obligations under the lease are discharged but the property is not returned to the lessor; or
- the property is lost or destroyed.
[New subsection 54AC(3)]
Property previously owned etc. by the lessee not eligible
8.13 The lessor will not to be treated as the owner of the property if, before the lease was entered into, the property was owned, and used or held for use, by the lessee or an associate, i.e. if the property is sold to the lessor and leased back.
8.14 That exclusion will not apply, though, if the lessor acquires the property within 6months of the lessee or associate first owning and using the property and at the time it was first owned or used, there was an arrangement that the property would be sold and leased back to the lessee. In these circumstances, the lease is treated as though it were the lessee's original form of financing of the property. That concession is not available, however, if when first acquired by the lessee or associate, the property was already a fixture on the land.
8.15 For purposes of applying those rules, the lessee or associate is treated as having sold the property to the lessor, and the lessor as having acquired it, notwithstanding that, as a fixture, it could not be sold separately from the land.
8.16 Where the lessor under a sale and leaseback is treated as the owner of the property, the lessor's cost for depreciation purposes is the lesser of the consideration paid by the lessor for the property and the depreciated value of the property in the hands of the lessee or associate at the time the lessor acquired it (adjusted for any balancing charge). Provided the relevant conditions are satisfied, the 6month concession will apply notwithstanding that, at the time of the sale to the lessor, the relevant property had already been affixed to the land.
[New section 54AD]
Lessor taken to have disposed of property in certain cases
8.17 Where the lessor is no longer treated as the owner of the property because any of the conditions specified in new subsection 54AC(3) applies, the lessor is taken to have disposed of the property for the purposes of section59 or 59AA of the Act. [New subsection 54AE(1)]
8.18 Section 59 includes in assessable income any excess of consideration on the disposal, loss or destruction of depreciated property over its depreciated value, or allows a deduction if there is a deficit. For that purpose, section 59AA treats a partial change in the ownership of property as a disposal of the property by all of the former owners to all of the new owners.
8.19 New subsections 54AE(2), (3) and (4) specify the amount of consideration in the various circumstances of disposal specified in new subsection 54AC(3) .
8.20 In the circumstances specified in new paragraphs 54AC(3)(a), (b) and (d) , i.e. broadly where the lessor does not recover the leased property, the lessor's consideration is any termination or residual amount receivable under the lease or any amount receivable as compensation, whichever is applicable. However, if the lessor and lessee are not acting at arm's length in relation to those transactions, the lessor's consideration on disposal is the market value of the property calculated as if it were not a fixture on the land. [New subsection 54AE(2)]
8.21 Where there has been an actual disposal of the property by the lessor as specified in new paragraph 54AC(3)(c) , the lessor's consideration is that part of the disposal price reasonably attributable to the property. If the disposal was not on arm's length terms, however, the consideration will not be less than the market value of the property calculated as if it were not a fixture on the land. [New subsection 54AE(3)]
8.22 If the property has been lost or destroyed as specified in new paragraph 54AC(3)(e) , the lessor's consideration is the amount or amounts receivable as compensation for the loss etc., e.g. insurance proceeds. [New subsection 54AE(4)]