Division 250 - tax preferred use of an asset

Will paragraph 250-60(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) and subparagraph 250-60(1)(b)(i) of the ITAA 1997 be satisfied and an asset be put to a tax preferred use for the purposes of subsection 250-60(1) of the ITAA 1997 if the asset is leased by a lessor that is a tax preferred entity to a taxable entity that uses the asset but not on behalf of a tax preferred end user?

No. Paragraph 250-60(1)(a) of the ITAA 1997 and subparagraph 250-60(1)(b)(i) of the ITAA 1997 will not be satisfied and an asset will not be put to a tax preferred use for the purposes of subsection 250-60(1) of the ITAA 1997 if the asset is leased by a lessor that is a tax preferred entity to a taxable entity that uses the asset but not on behalf of a tax preferred end user.

A taxable entity (Lessee Co) will lease assets from a tax preferred entity (Exempt Lessor) under circumstances where Lessee Co will be the holder of the assets that are depreciating assets for the purposes of Division 40 of the ITAA 1997 and holder under a quasi ownership right of the assets that are capital works for the purposes of Division 43 of the ITAA 1997.

Lessee Co uses the assets wholly within Australia in the carrying out of its business and does not use the assets on behalf of a tax preferred entity, including Exempt Lessor.

Subsection 250-60(1) of the ITAA 1997 provides that an asset is put to a tax preferred use if under paragraph 250-60(1)(a) of the ITAA 1997 an end user (or a connected entity) holds rights as lessee under a lease of the asset and under paragraph 250-60(1)(b) of the ITAA 1997 the asset is used by or on behalf of a tax preferred end user.

Paragraph 250-50(1)(a) of the ITAA 1997 provides the an entity is an end user of an asset if the entity uses or effectively controls the use of the asset.

Subsection 250-50(4) of the ITAA 1997 provides that an entity is taken to be an end user of an asset if the entity holds rights as a lessee under a lease of the asset.

Paragraph 36 of Taxation Ruling TR 96/22 provides that property may be simultaneously used by more than one entity, and that a person may use property notwithstanding that someone else is using or occupying it. Property that is subject to a lease may be simultaneously used by the lessee and by the lessor.

Lessee Co would be an end user under subsections 250-50(1) of the ITAA 1997 and 250-50(4) of the ITAA 1997, and would satisfy paragraph 250-60(1)(a) of the ITAA 1997 but it uses the asset for its own benefit and does not use the asset on behalf of a tax preferred entity.

Exempt Lessor will use the asset to derive rent and will thereby be an end user under subsection 250-50(1) of the ITAA 1997.

Although an asset may be used by both a lessee and a lessor, subsection 250-60(1) of the ITAA 1997 provides that the tax preferred use of the asset is that of the lessee in paragraph 250-60(1)(a) of the ITAA 1997 and the requirement in subparagraph 250-60(1)(b)(i) of the ITAA 1997 is whether at that time the asset is to be used by or on behalf of an end user who is a tax preferred end user. It is the use by the lessee and not the use by the lessor that is tested against subparagraph 250-60(1)(b)(i) of the ITAA 1997.

Paragraph 250-60(1)(a) of the ITAA 1997 and subparagraph 250-60(1)(b)(i) of the ITAA 1997 will be satisfied and an asset will be put to a tax preferred use if the lessee is an end user that is a tax preferred entity, or the lessee uses the asset on behalf of an end user who is a tax preferred end user.

As the lessee who uses the asset is a taxable entity and uses the asset wholly within Australia and does not use the asset on behalf of a tax preferred end user, subparagraph 250-60(1)(b)(i) of the ITAA 1997 will not be satisfied and the asset will not be put to a tax preferred use for the purposes of subsection 250-60(1) of the ITAA 1997.