Peter Costello

Media Releases

Hire Purchase and Limited Recourse Debt Transactions

NO. 021


In the 1997-98 Budget the Government announced it would amend the income tax law in relation to property acquired under hire purchase or limited recourse finance arrangements. The amendments were intended to rectify an anomaly in the capital allowance provisions which makes it possible for a taxpayer to obtain tax deductions greater than total amounts expended in relation to the cost of property that is financed under such arrangements.

Today I am announcing some changes to the way in which the amendments will be implemented and some technical amendments. These are necessary to ensure the measure announced in the Budget operates as intended.

The first change is that the amendments will cover capital allowance provisions which require a balancing adjustment on disposal of a capital asset (such as depreciation allowances) and those capital allowance provisions which do not (such as building write-offs).

  • (Balancing adjustments equalise tax deductions with a taxpayer’s net capital costs. They do so by allowing a tax deduction in the year the asset is disposed of if the disposal price is less than its depreciated value, or by including the excess of the disposal price over the depreciated value as taxable income.)

Second, the adjustment will be made on the termination of the underlying hire purchase or limited recourse debt arrangement, rather than at the time of disposal of the asset as originally announced. Only at that time would it be known that the relevant capital payments will not be made.

Another change is that unpaid amounts under hire purchase or limited recourse finance arrangements which reflect deductions allowed in excess of actual expenditure will be treated as a separate adjustment to taxable income, rather than as part of the consideration on disposal of the property as originally announced. This is a necessary consequential amendment of the changes already mentioned.

The Government has also decided to formalise in the law the longstanding administrative practice whereby taxpayers acquiring assets by hire purchase are treated as owners for the purpose of being eligible for capital allowances. This will ensure that the same person who is eligible to obtain capital allowances is liable to adjustments which reflect non-payment of amounts under the hire purchase agreement. Similar treatment will be given to instalment sales. The mortgagor under a chattel mortgage also will be treated as the owner if the mortgagor would be the legal owner of the asset but for the transfer of title by mortgage or security interest to secure a debt.

A taxpayer who is treated as the owner of an asset for capital allowance purposes (eg a hire purchaser) will be treated as the owner for the purposes of relevant anti-avoidance provisions of the Income Tax Assessment Act, such as section 51AD and Division 16D which relate to the use or control of property by tax exempt or non-resident entities.

Finally, a hire purchase or instalment sales agreement will be treated as creating a loan equal to the cost of the asset, and the payments under the agreement as comprising non-deductible principal and deductible finance charge components. The financier will be in the opposite position of receiving payments which comprise non-assessable capital repayments and assessable finance charge amounts. The finance charge component will be determined by reference to the interest rate implicit in the arrangement.

The amendments I am announcing today will apply from today. Accordingly:

  • the adjustment to taxable income where there are unpaid amounts of the cost of property under hire purchase and limited recourse debt arrangements will apply to such arrangements which terminate after today;
  • the ownership rules relating to hire purchase, instalment sales and chattel mortgages will apply to transactions entered into after today; and
  • the treatment of hire purchase and instalment sales as the equivalent of sales and loan transactions will apply to contracts entered into after today.

The Commissioner of Taxation’s administrative practice in relation to ownership under hire purchase, instalment sales and chattel mortgage transactions entered into on or before today will not change.



27 February 1998

Contact Officer: Brendan Flattery (Australian Taxation Office)

Telephone: (02) 6216 1554 or 0411 182 433

27 Feb 1998

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