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Income Tax Act 2007

Recharacterisation of certain transactions - Recharacterisation of certain commercial arrangements

FA 5: Assets acquired and disposed of after deduction of payments under lease

You could also call this:

"Selling something you leased and bought, and what happens with the extra money"

Illustration for Income Tax Act 2007

You lease something like a machine or a car. You get a deduction for the rental payments. Then you buy it and later sell it. If you sell it for more than you bought it for, the extra money is your income under section CG 7. But there are some rules that can change this. If you sell the thing with other things, you have to work out how much each thing is worth. If you give it away or sell it cheaply, it's like you sold it for what it's worth. If someone related to you buys it and then sells it for a profit, you might have to pay tax on some of that profit. There are some exceptions to these rules, like when you're sorting out relationship property.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516274.

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Part FRecharacterisation of certain transactions
Recharacterisation of certain commercial arrangements

FA 5Assets acquired and disposed of after deduction of payments under lease

  1. This section applies when a person (the lessee)—

  2. leases, rents, or hires an asset that is—
    1. plant, machinery, or other equipment; or
      1. a motor vehicle; or
        1. a temporary building; and
        2. is allowed a deduction for the rental payments; and
          1. acquires the asset and later disposes of it; and
            1. the consideration derived on the disposal is not income of the lessee under a provision of this Act other than this section.

              1. If the consideration derived by the lessee for the asset is more than the cost of its acquisition, the excess is income of the lessee under section CG 7 (Recoveries after deduction of payments under lease). Subsection (3) overrides this subsection.

              2. If the total amount of the deductions referred to in subsection (1)(b) is less than or equal to the excess, the amount of income under subsection (2) is the total amount of the deductions.

              3. If the asset is disposed of together with other assets, the total consideration must be apportioned to reflect the respective market values of the assets.

              4. If the asset is disposed of without consideration or for a consideration that is less than market value at the date of disposal, the asset is treated as having been disposed of at its market value.

              5. Subsection (2) also applies if a person associated with the lessee acquires the asset, whether from the lessee or not, and disposes of it for an amount that is more than the amount paid to acquire it. Association is determined at the time of acquisition by the associated person. The lesser of the excess and the total amount of the lessee’s deductions is treated as income of the lessee.

              6. In this section,—

              7. subsection (1)(c) does not apply to an acquisition on a settlement of relationship property:
                1. subsection (5) does not apply to a disposal on a settlement of relationship property.

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