Capital Allowances: hire purchase agreement - cost of the acquisition of the property

Does the 'cost of the acquisition of the property' for the purposes of subsection 240-35(2) of the Income Tax Assessment Act 1997 (ITAA 1997) include an amount that is only payable by the taxpayer on the happening of a future event which may or may not occur?

No. The 'cost of the acquisition of the property' for the purposes of subsection 240-35(2) of the ITAA 1997 does not include an amount that is only payable by the taxpayer on the happening of a future event which may or may not occur.

The 'cost of the acquisition of the property' is limited to amounts which, as at the time of acquisition, the taxpayer has a presently existing legal liability to pay in order to acquire the property. A contingent amount which is merely impending, threatened or expected is not a presently existing liability and is therefore not included in the cost to acquire the property.

The taxpayer purchased an asset from Company A and simultaneously entered into an agreement to lease the asset to Company B. The agreement between the taxpayer and Company B is a 'hire purchase agreement' for the purposes of Division 240 of the ITAA 1997. Company B has a right to buy the asset at the end of the arrangement.

The taxpayer paid an amount (the first instalment) on delivery of the asset. The taxpayer acquired legal title to the asset at this time. A further amount (the second instalment) is payable only if Company B exercises its right to buy the asset at the end of the arrangement. If that right is not exercised, the taxpayer will transfer the legal title in the asset back to Company A and the second instalment will not be payable.

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Division 240 deals with hire purchase agreements as defined in subsection 995-1(1). The broad scheme of the Division is to treat such hire purchase agreements as a sale of the relevant goods to the hirer, the 'notional buyer,' financed by an associated loan provided by the supplier, the 'notional seller'.

Subsection 240-35(2) includes any profit on the notional sale of property in the notional seller's assessable income. The profit is the excess of the 'consideration for the notional sale' over the 'cost of the acquisition of the property' for the notional seller.

The expression 'cost of the acquisition of the property' as it appears in subsection 240-35(2) is not defined in the ITAA 1997. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 5) 1999, which introduced Division 240, does not provide guidance on the meaning of the words.

The word 'cost' is defined in subsection 995-1(1). It has the meaning given by Subdivision 40-C for the cost of a depreciating asset and the meaning given by section 70-55 for the cost of an item of trading stock.

According to section 2-10 terms defined under the Act are generally identified by an asterisk appearing at the start of the term and subsection 995-1(1) will provide either the definition or the location of that definition. However, not all defined terms are identified in this way. Section 2-15 provides three qualifications to this general rule. These apply where the term occurs in non-operative material, where it occurs more than once in the same subsection, or where the term is one of a number of basic key terms.

As 'cost' is not an asterisked term in subsection 240-35(2) and none of the qualifications in section 2-15 apply, the word 'cost' as it appears in the expression 'cost of the acquisition of the property' in subsection 240-35(2) does not rely on the definition of 'cost' in subsection 995-1(1).

The expression 'cost of the acquisition of the property' also appears in subsection 240-25(5) which determines the cost of the property for the notional buyer. That subsection deems the 'cost of the acquisition of the property' to be either: • the amount stated to be the cost or value for the purposes of the arrangement if the parties were dealing with each other at arm's length; or • otherwise, the amount that would reasonably have been expected to have been paid for the purchase of the property if there had been an actual sale and the parties were dealing with each other at arm's length.

However, subsection 240-35(2) does not contain similar deeming rules for the notional seller and makes no reference to the rules in subsection 240-25(5).

In the absence of a legal definition, the meaning of the expression 'cost of the acquisition of the property' for the purposes of subsection 240-35(2) needs to be determined by interpreting the words in accordance with their customary usage.

The Macquarie Dictionary 2009 5th Edition relevantly defines 'cost' to mean 'the price paid to acquire, produce, accomplish, or maintain anything'. The word 'acquire' is relevantly defined to mean - 'to come into possession of; get as one's own; to gain for oneself through one's actions or efforts'.

The ordinary meaning of the expression, 'cost of the acquisition' is therefore the price paid to possess or own something.

In the context of subsection 240-35(2) the Commissioner considers that the 'cost of the acquisition of the property' is the price paid or payable to possess or own the property.

Legal title to the asset was transferred to the taxpayer on the payment of the first instalment. At the time that legal title was transferred the second instalment was not a presently existing legal liability because it was conditional on the happening of a future event. This means that second instalment was not an amount paid or payable to actually acquire the asset.

The 'cost of the acquisition of the property' for the purposes of subsection 240-35(2) is limited to amounts which, as at the time of acquisition, the taxpayer has a presently existing legal liability to pay in order to acquire the property. It does not include a contingent amount which is merely impending, threatened or expected.