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FA 9: Treatment when lease ends: lessee acquiring asset
or “Rules for buying leased items and how it affects your taxes”
You could also call this:

“Rules for when a rented item is returned at the end of a long-term lease”

This law talks about what happens when a finance lease ends. A finance lease is when you rent something expensive, like a car or a machine, for a long time.

When the lease ends, if you don’t buy the thing you’ve been renting, the person who owns it (the lessor) is treated like they bought it back. The price they’re treated as paying is called the ‘notional sale price’. This is usually the guaranteed residual value, which is the lowest amount the thing is worth at the end of the lease. If there’s no guaranteed value, it’s treated as zero.

If the owner then sells or leases the thing to someone else for more money than the notional sale price, they might have to share some of that extra money with you. If they sell or lease it for less, you might have to pay them the difference.

If you end the lease early and don’t buy the thing, the owner is treated as if they bought it back for a special price. This price is worked out by taking the amount you still owe on the lease and subtracting any money you paid to end the lease early.

There are special rules for aircraft engines. Some costs for aircraft engines don’t count when working out these prices.

These rules are more important than some other rules about how much things are worth when working out tax.

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Next up: FA 11: Adjustments for leases that become finance leases

or “Changes in tax reporting when a regular lease becomes a finance lease”
Next

Part F Recharacterisation of certain transactions
Recharacterisation of certain commercial arrangements

FA 10Treatment when lease ends: lessor acquiring asset

  1. This section applies when a finance lease ends by the date on which its term ends.

  2. If the lessee does not acquire the personal property lease asset by the date on which the term of the lease ends, the lessor is treated as having acquired it on that date at its guaranteed residual value. If there is no guaranteed residual value, the consideration is treated as zero. In this section, the consideration is called the notional sale price.

  3. Subsections (4) and (5) apply when the lessor sells, assigns, or leases the lease asset to another person under another finance lease on or after the date on which the term of the original lease ends.

  4. If the consideration is more than the notional sale price,—

  5. to the extent to which it is paid by the lessor to the lessee under the original finance lease, the notional sale price is increased by the amount of the difference; and
    1. to the extent to which it is not paid by the lessor to the lessee under the original finance lease, the amount of the difference is income of the lessor under section CC 12 (Lessor acquiring lease asset on expiry of term of lease) in the income year in which the original lease term ends.

      1. If the consideration is less than the notional sale price, and the lessee is required to pay the amount of the deficit to the lessor, the notional sale price is reduced by that amount.

      2. If the lease is terminated before the end of its term and the lessee does not acquire the lease asset, the lessor is treated as acquiring it for an amount calculated using the formula—

        outstanding balance − release payment.

        Where:

        • In the formula,—

        • outstanding balance is the amount of the outstanding balance of the loan on the date on which the lease is terminated:
          1. release payment is the amount the lessee paid to be released from their obligations under the lease.

            1. Expenditure of a person that relates to an aircraft including an unpriced aircraft engine and is deductible for the person under sections DW 5 and DW 6 (which relate to aircraft engine acquisitions and overhauls) is not included in an amount of consideration paid by the person for the aircraft, for the purposes of this section.

            2. Subsections (2) to (6) override section EE 45 (Consideration for purposes of section EE 44).

            Compare
            Notes
            • Section FA 10(7B) heading: inserted, on (applying for the 2017–18 and later income years), by section 96(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
            • Section FA 10(7B): inserted, on (applying for the 2017–18 and later income years), by section 96(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
            • Section FA 10 list of defined terms aircraft engine: inserted, on , by section 96(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
            • Section FA 10 list of defined terms consideration: inserted, on , by section 96(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
            • Section FA 10 list of defined terms unpriced aircraft engine: inserted, on , by section 96(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).