ATO Interpretative Decision

ATO ID 2002/735 (Withdrawn)

Income Tax

• 'This ATO ID is withdrawn from the database because it contains a view in respect of a provision of the Income Tax Assessment Act 1936 that does not apply after the 1996-97 income year. Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of decisions for income years up to, and including, the 1996-97 income year.'
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can the Commissioner's discretion under subsection 60(2) of the Income Tax Assessment Act 1936 (ITAA 1936) to disregard subsection 60(1) of the ITAA 1936, be exercised where an asset, the subject of a sale and lease back arrangement, was previously used for less than a year in the lessee's business operations?

Decision

Yes, the Commissioner's discretion under subsection 60(2) of the ITAA 1936 should be exercised to disregard subsection 60(1) of the ITAA 1936, where the lessee, under a sale and leaseback, did not own and use the assets for a number of years in its business operations.

Facts

1.

The taxpayer (as lessor) is a company in the finance industry.

2.

Under a written sale and leaseback agreement, the taxpayer purchased from company "O" assets, which it leased back to O for a specified term.

3.

Some nine months earlier O, by written purchase agreements, bought the assets from another company "S", for a set price. S, in turn, had purchased the assets for a lesser amount.

4.

In its income tax returns the taxpayer claimed a deduction for depreciation of the assets using the actual purchase price, which was greater than the purchase price that O had paid for the assets. The Commissioner was required to consider whether the amount of depreciation that should have been allowed should have been calculated based on the price S paid for the assets.

5.

The taxpayer argued that the Commissioner ought to have exercised his discretion under subsection 60(2) of the ITAA 1936 to disregard the limitation placed by subsection 60(l) of the ITAA 1936 on the permissible depreciation base. Depreciation, it claimed, ought to have been allowed on the taxpayer's actual purchase price.

Reasons for Decision

The Commissioner has formed the opinion under subsection 60(2) of the ITAA 1936, that subsection 60(1) of the ITAA 1936 should not apply. That is, the purchaser of the second hand property leased back to the vendor is not limited in its claims for depreciation to the sum of the depreciated value of the property in the hands of the vendor and the subsection 59(2) of the ITAA 1936 amount assessable to the vendor.

Taxation Ruling IT 2354, deals with "depreciable property sold under arrangements where the vendor retains use or benefits of property sold." Paragraph 7 of the Ruling refers to circumstances '...where the taxpayer has owned depreciable property and used it for a number of years in his business operation, has sold the depreciable property to raise finance.' In these circumstances the Commissioner considers that the discretion in subsection 60(2) of the ITAA 1936 should not apply.

The facts in the present case are distinguishable from those considered in the Ruling. O had not owned and used the assets for 'a number of years' in their business operations. Therefore Taxation Ruling IT 2354 will not apply in this case and the Commissioner has exercised his discretion under subsection 60(2) of the ITAA 1936 to disregard subsection 60(1) of the ITAA 1936. Thus, the depreciation base will be equal to the actual amount paid by the taxpayer for the assets.

Year of income:  1989 Income Year

Legislative References:
Income Tax Assessment Act 1936
   subsection 59(2)
   subsection 60(1)
   subsection 60(2)

Case References:
Case 38/95
   95 ATC 341

Related Public Rulings (including Determinations)
Taxation Ruling IT 2354

Keywords
Sale & leaseback of plant
Cost of a depreciating asset

Business Line:  Public Groups and International

Date of publication:  31 July 2002

ISSN: 1445-2782