Division 240: 'notional buyer' under a hire purchase agreement

Would the taxpayer, who entered into a hire purchase arrangement (which included an option to purchase the goods on hire) after 27 February 1998, be treated as the 'notional buyer' of the goods under subsection 240-17(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer would be treated under subsection 240-17(2) of the ITAA 1997 as the 'notional buyer' of the goods under the hire purchase agreement to which Division 240 of the ITAA 1997 applies, because the agreement conferred upon the taxpayer a right to use the goods and an option to purchase the goods.

In January 2000, the taxpayer entered into an arrangement with a plant supplier for plant used by the taxpayer in carrying on a business for the purpose of producing assessable income. The arrangement conferred upon the taxpayer an option to purchase the plant.

On the facts of the case, the taxpayer, as notional buyer, would have been the owner or the quasi-owner of the plant on hire if the arrangement had been a sale of the plant, and it was reasonably likely that the option to purchase the plant would be exercised by, or in respect of, the taxpayer.

The term of the hire purchase agreement was for 48 months with an option to terminate early. The agreement was terminated at the end of 18 months. The taxpayer acquired the plant at the end of the 18 months.

Division 240 of the ITAA 1997 deals with hire purchase agreements (as defined in subsection 995-1(1) of the ITAA 1997) entered into after 27 February 1998. The broad scheme of the Division is to treat such hire purchase agreements as a sale of the relevant goods to the hirer (notional buyer) combined with a loan from the supplier (notional seller) to the notional buyer.

A 'hire purchase agreement', as defined in subsection 995-1(1) of the ITAA 1997, means: (a) a contract for the hire of goods where: (i) the hirer has the right, obligation or contingent obligation to buy the goods; and Note: An example of a contingent obligation is a put option. (ii) the charge that is or may be made for the hire, together with any other amount payable under the contract (including an amount to buy the goods or to exercise an option to do so), exceeds the price of the goods; and (iii) title in the goods does not pass to the hirer until the option referred to in subparagraph (a)(i) is exercised; or (b) an agreement for the purchase of goods by instalments where title in the goods does not pass until the final instalment is paid.

The hire purchase arrangement entered into by the taxpayer met the paragraph (a) definition of 'hire purchase agreement'. As such, 'prima facie', Division 240 would apply (section 240-10 of the ITAA 1997).

The taxpayer was the 'notional buyer' as the taxpayer was a party to the arrangement and under the arrangement, the taxpayer had the right to use the plant on hire (subsection 240-17(2) of the ITAA 1997).

Because the taxpayer, as notional buyer, would have been the owner or the quasi-owner of the plant on hire if the arrangement had been a sale of the plant, and it was reasonably likely that the option to purchase the plant would be exercised by or in respect of the taxpayer, both requirements in subsection 240-115(1) of the ITAA 1997 were met under the arrangement.

The modifications in section 240-115 of the ITAA 1997 therefore did not apply and the notional buyer was taken to own the plant (subsection 240-20(2) of the ITAA 1997).