Capital Allowances: meaning of 'value of property' where a hire purchase agreement ends

Does the expression 'the value of the property at the end of the arrangement' in paragraph 240-78(c) of the Income Tax Assessment Act 1997 (ITAA 1997) mean the market value of the property at the end of the hire purchase agreement?

Yes. The expression 'the value of the property at the end of the arrangement' in paragraph 240-78(c) of the ITAA 1997 means the market value of the property at the end of the hire purchase agreement.

The taxpayer entered into an arrangement that was a hire purchase agreement with a finance provider, a Bank, for plant used by the taxpayer in carrying on a business for the purpose of producing assessable income.

The term of the hire purchase agreement was for 60 months. The hire purchase agreement was terminated early. The Bank repossessed the plant and advised the taxpayer of the amount outstanding under the hire purchase agreement. The taxpayer did not extend or renew the agreement nor reacquire the plant.

The taxpayer disputed the amount advised as outstanding. Under a negotiated settlement the taxpayer paid the Bank a settlement payment comprised of a payment and the return of the plant.

Division 240 of the ITAA 1997 deals with hire purchase agreements as defined in subsection 995-1(1) of the ITAA 1997. 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.

The taxpayer was the notional buyer and the Bank was the notional seller under the hire purchase agreement (section 240-17 of the ITAA 1997). The hire purchase agreement ended when the plant was repossessed (section 240-75 of the ITAA 1997).

Section 240-78 of the ITAA 1997 gives the meaning of termination amount as an amount payable because the hire purchase agreement ends.

Paragraph 240-78(c) of the ITAA 1997 provides that a termination amount includes the value of the property at the end of the hire purchase agreement. It is intended that the expression 'value of the property' means the market value of the property at the end of the hire purchase agreement. This covers situations where the property is returned to the notional seller as a form of payment towards the outstanding debt when the hire purchase agreement is terminated early.

This is consistent with subsection 240-90(3) of the ITAA 1997, which provides that in these circumstances (and where the hire purchase agreement has not been extended or renewed) both the notional buyer's sale consideration and the notional seller's cost of acquisition of the property are taken to be equal to the market value of the property at the end of the hire purchase agreement.

Accordingly, 'the value of the property at the end of the arrangement' in paragraph 240-78(c) of the ITAA 1997 means the market value of the property at the end of the hire purchase agreement