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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:

“Tax rules for buying and selling previously leased assets”

When you lease, rent, or hire certain things like equipment, vehicles, or temporary buildings and get a tax deduction for the payments, this law applies to you if you later buy and sell that item. If you sell it for more money than you paid to buy it, you might have to pay tax on some of that extra money.

The amount of tax you pay depends on how much extra money you made and how much you claimed in deductions. If the extra money is more than all your deductions, you’ll pay tax on all the deductions. If the extra money is less than your deductions, you’ll only pay tax on the extra amount.

If you sell the item along with other things, the sale price needs to be split up fairly based on what each item is worth. If you give the item away or sell it for less than it’s worth, the law treats it as if you sold it for its real value.

This law also applies if someone connected to you buys the item and then sells it for more than they paid. In this case, you might have to pay tax on the extra money they made, up to the amount of deductions you claimed.

These rules don’t apply when property is transferred because of a relationship breakup.

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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.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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Part F Recharacterisation 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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