ATO Interpretative Decision

ATO ID 2003/375

Income Tax

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

Issue

If an STS taxpayer rents out appliances to their customers where each agreement requires an initial rental period of four months, can the taxpayer claim a deduction for the appliance under subsection 328-180(1) or section 328-185 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The STS taxpayer cannot claim a deduction under subsection 328-180(1) or section 328-185 of the ITAA 1997 for the appliance, as the appliance is being let predominantly on depreciating asset lease rather than short-term hire agreements.

Facts

The STS taxpayer runs a business of renting appliances to the general public.

Each rental agreement or contract provides that the initial term of renting is for a period of four months. After the initial period, an appliance is rented to the customer on a monthly basis. The customer may terminate the rental agreement or contract by giving four weeks' notice. Rental charge is collected every month. The rental agreement is not a hire purchase agreement.

The appliance in question is used solely for business purposes and is being rented by customers for more than 50% of the time in an income year. The asset was rented to the same customer for about 10 months in the 2001-02 income year.

Reasons for Decision:

Subdivision 328-D of the ITAA 1997 provides the rules for STS taxpayers in calculating deductions for depreciating assets. Certain types of depreciating assets are however specifically excluded from Subdivision 328-D of the ITAA 1997.

One exclusion is where a depreciating asset is being let, or might reasonably be expected to be let predominantly on a depreciating asset lease (subsection 328-175(6) of the ITAA 1997). A 'depreciating asset lease' is defined in subsection 995-1(1) of the ITAA 1997 and it does not include a short-term hire agreement. Hence, if the appliance is hired out under a short-term hire agreement, then Subdivision 328-D of the ITAA 1997 will apply.

Short-term hire agreement.

A 'short-term hire agreement' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

a short-term hire agreement is an agreement for the intermittent hire of an asset on an hourly, daily, weekly or monthly basis. However, an agreement for the hire of an asset is not a short-term hire agreement if, having regard to any other agreements for the hire of the same asset to the same taxpayer or an *associate of that taxpayer, there is a substantial continuity of hiring so that the agreements together are for longer than a short-term basis.

Note: * denotes a term defined in subsection 995-1 of the ITAA 1997.

From this definition, the features of a short-term hire agreement can be summed up as:

(a)

an agreement that lets an asset to a customer on an hourly, daily, weekly or monthly basis

(b)

the maximum period of rental is one month; and

(c)

the agreement ends after each period and is then let to a different customer.

The taxpayer's rental agreements for the appliance in question are not short-term hire agreements because:

(a)

they are not agreements that let the appliance to customers on a monthly basis;

The taxpayer's rental agreements are not monthly agreements because the taxpayer requires every customer to hire the appliance for an initial period of four months to compensate for the initial costs incurred. Hence, the taxpayer's rental agreements cannot be characterised as monthly agreements that are renewed to four months.

(b)

they are longer than the maximum rental period of one month; and

The initial period of four months for each rental agreement makes the rental agreements much longer than the one-month prescribed period.

(c)

one rental agreement in the 2001-02 income year had lasted for about ten months.

There is a substantial continuity of hiring even if the rental agreement is construed as monthly agreements being renewed for a longer period.

As the definition of 'short-term hire agreement' only envisages the longest period of hiring to be on a one-month basis, a continuous ten months to the same person is considered to be 'substantial continuity' of hiring in this context.

This means that the rental agreement is a depreciating asset lease. The appliance in question is being let predominantly on a depreciating asset lease under subsection 328-175(6) of the ITAA 1997 as it is rented out for more than 50% of the time in the 2001-02 income year.

Therefore, the appliance is specifically excluded from the STS depreciation rules under subsection 328-175(6) of the ITAA 1997. The taxpayer cannot claim a deduction under subsection 328-180(1) or section 328-185 of the ITAA 1997 for the 2001-02 income year.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   subsection 328-175(6)
   subsection 328-180(1)
   section 328-185
   subsection 995-1(1)

Keywords
Short term hire agreement
Capital allowances for STS taxpayers
Depreciating asset lease

Business Line:  Business and Personal Taxes Centre of Expertise

Date of publication:  23 May 2003

ISSN: 1445-2782