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Ruling
Subject: Application of Division 16D of the Income Tax Assessment Act 1936.
Question 1
Does Division 16D of the Income Tax Assessment Act 1936 (ITAA 1936) require a reassessment of the outcomes of the calculations in section 159GK of ITAA 1936 where the actual arrangment payments differ from the likely arrangement payments?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2011.
The scheme commences on:
Commencement date of the lease agreement.
Relevant facts and circumstances
The Taxpayer owned a building known as the Premises.
In 2001, the Taxpayer entered into a lease agreement with a Government Agency for the lease of the Premises.
Rent was payable in accordance with the terms of the lease agreement.
The lease of the Premises constituted a 'qualifying arrangment' for the purposes of Division 16D of the ITAA 1936.
The Taxpayer prepared a calculation at that time to determine the assessable income arising from the lease arrangment in accordance with section 159GK of the ITAA 1936 (original Division 16D calculations). The calculation took into account the 'likely arrangment payment' in relation to the 'likely application period'.
Over the life of the tenancy, the actual payments received by the Taxpayer changed from those that were forecast at the time the original Division 16D calculations were completed.
At end of the lease term, a new lease of the Premises was executed between the Taxpayer and Government Agency.
Relevant legislative provisions
Income Tax Assessment Act 1936 Division 16D.
Income Tax Assessment Act 1936 subsection 159GE(1).
Income Tax Assessment Act 1936 section 159GF.
Income Tax Assessment Act 1936 subsection 159GG(5).
Income Tax Assessment Act 1936 section 159GK.
Income Tax Assessment Act 1936 subsection 159GK(1).
Income Tax Assessment Act 1936 subsection 159GK(2).
Income Tax Assessment Act 1936 subsection 159GK(6).
Income Tax Assessment Act 1936 subsection 159GM.
Income Tax Assessment Act 1936 subsection 170(10).
Reasons for decision
Broadly, Division 16D treats certain non-leveraged finance leases and similar arrangements as if they were loan arrangements.
Division 16D does not provide for any reassessment of the calculated interest rate underlying the transaction, nor should it be necessary. Where the arrangement payments received are greater than those 'likely arrangement payments' used to calculate the interest rate, that part of the arrangement payment received in any given payment period that does not constitute the assessable interest portion, will constitute repayment of principal.
Accordingly, the receipt of an arrangement payment in excess of that anticipated in any given payment period will result in a greater amount being applied to the outstanding loan principal and may result in the loan under Division 16D being repaid earlier than anticipated. Where the loan is repaid early, the Division ceases to apply and any further arrangement payments are assessable income.