Hire purchase agreement: holder of an asset

Upon entering into an arrangement for the term purchase of a depreciating asset, which provides the purchaser with a right to sell the asset to the owner (or an entity nominated by the owner) at a predetermined price at the end of the term of the arrangement, does the purchaser start to hold the asset under Item 6 of the table in section 40-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Upon entering into the arrangement for the term purchase of a depreciating asset, which provides the purchaser with a right to sell the asset to the owner (or an entity nominated by the owner) at a predetermined price at the end of the term of the arrangement, the purchaser starts to hold the asset under Item 6 of the table in section 40-40 of the ITAA 1997.

The purchaser enters into an arrangement for the purchase by instalments of a depreciating asset. Under the arrangement, the asset remains the property of the owner (the legal owner) until all the payment obligations of the term purchase are met. Other relevant features of the arrangement include the following: • The purchaser takes immediate possession of the asset and maintains possession during the term of the arrangement. • The asset is a chattel. • The purchaser will become the legal owner of the asset once all the obligations of the term purchase are met. • The purchaser has a right to sell the asset to the owner (or an entity nominated by the owner) at a predetermined price immediately prior to the end of the term of the arrangement. • Where the right to sell is exercised, the consideration on the sale of the asset is not paid directly to the purchaser but offset against the purchaser's final payment obligation under the term purchase. The purchaser becomes the owner of the asset for the instant in time before the asset is transferred to the party to whom the asset is sold. • The purchaser's obligations due under the arrangement are absolute and unconditional and can not be withheld by the purchaser for any reason. • The owner is in the business of conducting such arrangements for the purchase of assets and can be expected to professionally pursue the payment of debts incurred under these arrangements.

Division 40 of the ITAA 1997 provides a deduction for the decline in value of a depreciating asset a taxpayer holds 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 the holder of a depreciating asset in any particular circumstance. The basic (or default) rule is that the taxpayer holds the asset if they are the owner (the legal owner) of the asset (Item 10 of the table in section 40-40 of ITAA 1997). However, there are items that identify a holder in various other circumstances even though they are not the asset's owner.

One of these circumstances is contained in Item 6 of the table in section 40-40 of the ITAA 1997 and applies where: • a taxpayer 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.

During the term of this arrangement, the purchaser will possess the asset and has the right to become its legal owner upon meeting all the payment obligations of the term purchase arrangement.

Where the right to sell is exercised, the asset is disposed of at the direction of the purchaser and the disposal will benefit the purchaser in meeting their final payment obligations under the arrangement. The purchaser will also become the legal holder of the asset for the instant in time before the asset is transferred to the nominated party who subsequently acquires the asset.

Where the right to sell is not exercised, the purchaser will become the legal owner upon meeting its final payment obligations.

Irrespective of whether the right to sell is exercised, the purchaser will become the legal owner of the asset (albeit only for an instant where the purchaser decides to exercise the right to sell) when the purchaser completes its payment obligations under the terms of the agreement. It is also reasonable to expect that the purchaser will complete its payment obligations under the arrangement because its payment obligations are unconditional and absolute and the owner can be expected to pursue the payment of debts incurred by the purchaser under these arrangements.

Consequently, the tests contained in Item 6 of the table in section 40-40 of the ITAA 1997 are satisfied by the purchaser upon entering into the arrangements set out above for the purchase of the depreciating asset. Upon entering into the arrangement, the asset stops being held by the owner and starts to be held by the purchaser.