Capital Allowances: holder of a depreciating asset -possession and right to legally own in the future - family arrangement

Is the taxpayer the holder under section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997) of a depreciating asset which the taxpayer possesses under a family arrangement, but has been initially purchased and registered in the name of the taxpayer's relative?

Yes. The taxpayer is the holder of the depreciating asset under item 6 of the table in section 40-40 of the ITAA 1997.

The taxpayer wished to purchase a car but was unable to obtain finance until after a probationary period of employment had expired. The taxpayer therefore entered into an arrangement with a relative which provided that the relative would initially acquire the car from a car dealer, the car would be registered in the relative's name and the taxpayer would immediately take possession of the vehicle. The required deposit was to be paid by the taxpayer directly to the car dealer. The arrangement also provided that once the taxpayer obtained finance, the relative would be paid the amount of the initial car purchase price, less the deposit already paid, and the car registration would be transferred to the taxpayer. No money would be paid by the taxpayer to the relative prior to transfer of registration and no interest would be charged by the relative.

Both parties to the arrangement anticipated that the taxpayer would soon successfully complete the probationary period of employment and be able to obtain the bank loan which would allow the taxpayer to pay the relative the initial purchase price in exchange for full legal ownership.

Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset you hold, to the extent the asset is used for a taxable purpose (section 40-25 of the ITAA 1997).

The table in section 40-40 of the ITAA 1997 identifies who is the holder of a depreciating asset. The effect of the table is that, unless another item provides otherwise, the legal owner of the depreciating asset is the holder (item 10 of the table). Item 6 of the table provides that the economic owner, and not the legal owner, is the holder where: • the taxpayer (the economic owner) has possession, or an immediate right to possession, of the asset combined with a right, the exercise of which would make them the holder (for example, an option to acquire); and • it is 'reasonable to expect' that the taxpayer will become the holder by exercising that right or that the asset will be disposed of at their direction and for their benefit.

The effect of item 6 applying to an arrangement is that the entity in possession of the asset is taken to be the holder of the depreciating asset for the purposes of Division 40 of the ITAA 1997, and the legal owner is not the holder.

The taxpayer possessed the vehicle during the income year and had a right to obtain legal title to it. Exercise of this right would have resulted in the taxpayer being the holder under item 10 of the table in section 40-40 of the ITAA 1997. During the period that the taxpayer possessed the vehicle it was reasonable to expect that the taxpayer would exercise this right.

The 'reasonable to expect' test is satisfied in these particular circumstances because the taxpayer's arrangement was agreed to by both parties under the reasonable expectation that each party would be willing and able to fulfil their obligations under the arrangement and there is nothing to suggest that it is reasonable to expect that this would not happen.

The taxpayer was the holder of the depreciating asset under item 6 of the table in section 40-40 of the ITAA 1997 from the time the taxpayer took possession of the vehicle to the time that the vehicle was registered in the taxpayer's name. The relative was not the holder during this period.