Capital Allowances: balancing adjustment event - item of plant acquired under a hire purchase arrangement

Does a balancing adjustment event occur, under subsection 42-30(3) of the Income Tax Assessment Act 1997 (ITAA 1997), for an item of plant where the notional buyer under a hire purchase arrangement ends the arrangement by acquiring the plant?

No. A balancing adjustment event does not occur, under subsection 42-30(3) of the ITAA 1997, for an item of plant as there has been no disposal. This is because there is a continuation of ownership for the purposes of Division 42 of the ITAA 1997.

In January 2000, the taxpayer entered into an arrangement to lease an item of plant with an option to purchase the plant at the end of 12 months. In January 2001, the taxpayer ended the arrangement by taking up the option to acquire the plant. The taxpayer consequently became the legal owner of the plant and continued to use it in their business.

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 Division applies to hire purchase arrangements entered into after 27 February 1998.

A hire purchase agreement is defined in subsection 995-1(1) of the ITAA 1997 as a contract for the hire of goods where the hirer has the right, obligation or contingent obligation to buy the goods.

Paragraph 240-20(2)(a) of the ITAA 1997 treats the notional buyer to such an arrangement who has the right to use the property as the owner until the arrangement ends. If such an arrangement is ended by a taxpayer (notional buyer) acquiring the property, the taxpayer becomes its legal owner. Where this happens there is no interruption in the taxpayer's ownership for the purposes of Division 42 of the ITAA 1997 between possessing the asset under the hire purchase arrangement and possessing the asset as its legal owner.

Accordingly, no balancing adjustment event occurs under subsection 42-30(3) of the ITAA 1997 for the item of plant.