ATO Interpretative Decision

ATO ID 2003/148

Uniform Capital Allowances

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the 'reasonable to expect' test contained in Item 6 of the hold table in section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied by the particular call option the lessee holds under their lease?

Decision

Yes. The 'reasonable to expect' test contained in Item 6 of the hold table in section 40-40 of the ITAA 1997 is satisfied by the particular call option held by the lessee under their lease because of the nature of the call option and the weighting of factors influencing the lessee to exercise the option.

Facts

The taxpayer (the lessee) purchased a depreciating asset which they immediately sold to and leased back from an unrelated entity (the lessor). Other relevant features of the arrangement are:

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the taxpayer maintains possession of the asset at all times;

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the asset is a chattel;

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the taxpayer holds a call option over the asset which is exercisable at the end of the lease;

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the lessor holds a put option over the asset which is exercisable at the end of the lease;

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the asset is specifically adapted to the special requirements of the taxpayer;

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the asset is likely to have a market value at the option time significantly in excess of the call option price; and

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the taxpayer has a history of entering into similar arrangements for similar assets where the taxpayer has almost always exercised their call option to purchase the leased asset.

Reason for Decision

Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset a taxpayer holds to the extent the asset is used for a taxable purpose (section 40-25 of the ITAA 1997). The table in section 40-40 of the ITAA 1997 identifies the holder of a depreciating asset in any particular circumstance. The basic (or default) rule is that the taxpayer holds if they are the owner of the asset (Item 10 of the table in section 40-40 of ITAA 1997). However, there are items that identify a holder in various other circumstances even though they are not the asset's owner.

One of these circumstances is contained in Item 6 of the table in section 40-40 of ITAA 1997 and applies where:

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a taxpayer has possession, or an immediate right to possession, of the asset combined with a right, the exercise of which would make them the holder (e.g. an option to acquire); and

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it is 'reasonable to expect' that the taxpayer will become the holder by exercising that right or that the asset will be disposed of at their direction and for their benefit.

The reasonable to expect test is satisfied in these particular circumstances because:

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an independent assessment suggests that the asset is likely to have a market value at the option time significantly in excess of the call option price, particularly because of the favourable price at which the asset was first acquired; and

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the taxpayer has a history of entering into similar lease arrangements for similar assets where the taxpayer has almost always exercised their call option to purchase the leased asset because of the taxpayer's operational requirements; and

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the taxpayer's operational requirements have been consistent over a considerable period of time and there is nothing to suggest this pattern will change.

The fact that the lessor holds a put option over the asset is not, of itself, relevant to whether the taxpayer's particular circumstances satisfy the 'reasonable to expect' test because the put option is not a right held by the lessee.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   Section 40-25
   Item 6 of the table in section 40-40
   Item 10 of the table in section 40-40

Keywords
Capital Allowance CoE
Economic Holder
Hold a depreciating asset
Lease financing
Reasonable to expect
Uniform capital allowances system

Business Line:  Capital Allowances Centre of Expertise

Date of publication:  21 March 2003

ISSN: 1445-2782