Division 240: 'adjustment amount' for the notional buyer under a hire purchase agreement

Would an adjustment amount pursuant to section 240-110 of the Income Tax Assessment Act 1997 (ITAA 1997) be required for the taxpayer, the notional buyer under a hire purchase agreement to which Division 240 of the ITAA 1997 applies, whether or not the option to purchase the relevant goods is exercised by, or in respect of, the taxpayer?

Yes. An adjustment amount pursuant to section 240-110 of the ITAA 1997 would be required for the taxpayer under the hire purchase agreement irrespective of whether the option to purchase the relevant goods is exercised by, or in respect of, the taxpayer.

In January 2000, the taxpayer entered into an arrangement which was a hire purchase agreement 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. It was reasonably likely that the option to purchase 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.

Subdivision 240-G of the ITAA 1997 provides for adjustments where the total amount assessed to the notional seller differs from the finance charge worked out at the end of the relevant arrangement for the notional loan (section 240-100 of the ITAA 1997). Any adjustment for the notional seller, as determined under section 240-105 of the ITAA 1997, is to be made in the year of income in which the arrangement ends.

An assessable (or deductible) amount for the notional seller will result in a corresponding deductible (or assessable) amount for the notional buyer. The adjustment for the notional buyer is deductible or assessable only to the extent that the notional buyer would, apart from Division 240 of the ITAA 1997, have been entitled to deduct 'arrangement payments' if no part of those payments were capital in nature (section 240-110 of the ITAA 1997).

The taxpayer, as the notional buyer under the hire purchase agreement to which Division 240 of the ITAA 1997 applies, would be entitled to deduct 'notional interest' calculated as prescribed by section 240-60 of the ITAA 1997 to the extent that the relevant goods are used for the purposes of producing assessable income.

Any subsequent adjustment to the taxpayer's deductible or assessable amount (as the case requires) would be determined pursuant to section 240-110 of the ITAA 1997, whether or not the option to purchase the relevant goods is exercised by, or in respect of, the taxpayer.