ATO Interpretative Decision
ATO ID 2002/1037
Income Tax
Division 40: hold - partnership depreciating asset subject to a call optionFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the leasing partnership a holder of the depreciating assets under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes, the leasing partnership is a holder of the depreciating assets pursuant to Item 7 of the table in section 40-40 of the ITAA 1997.
Facts
A partnership purchased various depreciating assets under a manufacture and supply agreement. It immediately leased the assets on a commercial basis to an unrelated entity that had been awarded a franchise by another unrelated entity to operate a business in which the assets are used. As part of an arrangement with the partnership, the franchisor was granted a call option over the leased assets so that, on exercising the option to purchase the assets, the franchisor can make the assets available to a subsequent franchisee in certain circumstances.
Reason for Decision
In broad terms, the holder of a depreciating asset is its economic owner. There may be several economic owners of a depreciating asset. The economic owners are the entities that are able to access the asset's economic benefits while stopping other entities from doing the same.
The leasing partnership holds legal title to the depreciating assets.
In some cases, however, for an entity to hold an asset in a particular way excludes another entity from being an economic owner of the asset. In these cases, the legal owner may not be the economic owner.
One case in which the economic owner of a tangible asset is an entity other than its apparent holder (for example, the legal owner) is where the other entity possesses, or has the right against the apparent holder to possess, the asset immediately and has a right to become the holder of the asset and it is reasonable to expect that the right will be exercised. In this situation, the other entity is treated as the holder of the depreciating asset to the exclusion of the apparent holder (Item 6 of the table in section 40-40 of the ITAA 1997).
The franchisor holds a call option (exercisable in certain circumstances including where the lease is terminated early by the lessor or the franchise agreement terminates early) the exercise of which would require the lessor to sell the depreciating assets to the franchisor or a person nominated by the franchisor. The franchisor does not have actual possession of the assets and the right to possession it does have under the call option is not immediate but conditional and contingent. In these circumstances, Item 6 of the table in section 40-40 of the ITAA 1997 does not apply to treat the franchisor as a holder of the assets while the call option remains unexercised.
Another specific case which recognises that an economic owner of a depreciating asset is its holder to the exclusion of other entities is a depreciating asset that is a partnership asset.
Whether a particular depreciating asset is a partnership asset for the purpose of Division 40 of the ITAA 1997 is determined in accordance with partnership law. This is a question of fact that can only be determined from the terms of the partnership agreement and/or inferences drawn from the conduct of the partners towards the asset.
A depreciating asset that is a partnership asset is held by the partnership and not by any particular partner, either alone or jointly with the other partners (Item 7 of the table in section 40-40 of the ITAA 1997).
The transaction documents evidence the simple case where the leasing partnership acquired, under contract, assets from partnership funds that are put to use exclusively in the partnership leasing business.
Date of decision: 12 July 2002Year of income: 2000
Legislative References:
Income Tax Assessment Act 1997
section 40-40
Keywords
Depreciating asset
Division 40
Hold
Partnership asset
ISSN: 1445-2782