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FZ 1: Treatment of interest payable under debentures issued before certain date
or “Tax rules for interest on certain company loans issued before October 1986”
You could also call this:

“How specified leases are treated for tax purposes”

When you lease a personal property item under a specified lease, it’s treated as if you bought the item at the start of the lease. The person who owns the item (the lessor) is seen as selling it to you (the lessee). You’re considered to have spent money equal to the cost of the item.

The lessor is treated as if they’ve given you a loan for the same amount as the cost of the item. You’re seen as using this loan to buy the item.

The lessor can’t claim a deduction for depreciation loss on the item under section DZ 14(2).

If you don’t buy the item at the end of the lease, it’s treated as if it’s sold back to the lessor. The sale price is either the guaranteed leftover value in the lease, or nothing if there’s no guaranteed value.

If the lease ends early, the item is treated as sold back to the lessor. The price depends on how much of the loan is left and what you pay to end the lease. Sometimes, the lessor might make extra income from this.

If the lessor sells or leases the item to someone else after your lease, the price might change based on what was decided at the end of your lease.

If you or someone connected to you buys the item and then sells it for more, the extra money is counted as income under section CZ 20.

There’s a special way to calculate how much of the loan is left. It involves adding up all the money lent, plus interest, and taking away the payments you’ve made.

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Next up: FZ 3: Income of lessor under specified lease

or “How the owner's income is calculated for special lease agreements”
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Part F Recharacterisation of certain transactions
Terminating provisions

FZ 2Effect of specified lease on lessor and lessee

  1. The leasing of a personal property lease asset under a specified lease is treated as a sale of the asset, made at the start of the term of the lease, by the lessor to the lessee. The lessee is treated as having incurred, through the sale, capital expenditure of an amount equal to the cost price of the asset.

  2. A lessor under a specified lease is treated as having advanced to the lessee a loan of an amount equal to the cost price of the personal property lease asset. The lessee is treated as having applied the loan in the financing of the acquisition of the asset.

  3. A lessor under a specified lease is denied a deduction under section DZ 14(2) (Deductions under specified leases) for an amount of depreciation loss for the personal property lease asset.

  4. At the end of the term of a specified lease, if the personal property lease asset is not acquired by the lessee under the terms of the lease or in the exercise of an option under the lease, the asset is treated as sold at the end of the term of the lease to the lessor for—

  5. an amount equal to the guaranteed residual value, if any, set out for the asset in the lease; or
    1. if no guaranteed residual value is set out in the lease, no consideration.

      1. If a specified lease is terminated before the term of the lease ends, whether by cancellation, surrender, or otherwise,—

      2. the personal property lease asset relating to the lease is treated as sold on the date of the termination to the lessor by the lessee at a price equal to the amount by which the amount of the outstanding balance, at the time of termination, of a loan advance by the lessor to the lessee is more than the amount or the sum of the amounts payable by the lessee to the lessor in consideration for the release by the lessor of the lessee from the obligations of the lessee under the lease:
        1. despite paragraph (a), if, in relation to the amount of the outstanding balance and the amount or the sum of the amounts payable by the lessee to the lessor, no excess arises, the asset is treated as having been sold for no consideration:
          1. if the value of the consideration payable by the lessee to the lessor in relation to the termination is more than the amount of the outstanding balance, at the time of termination, of a loan advanced by the lessor to the lessee, an amount equal to the amount of the excess is treated as income derived by the lessor in the income year in which the lease is terminated.

            1. If, on or after the end of the term of a specified lease, the personal property lease asset relating to the lease is sold, assigned, or leased under a specified lease by the lessor to another person, and the value of the consideration on the sale, assignment, or lease—

            2. is more than the amount determined for the first specified lease under subsection (4), the amount determined is increased by a further amount that is equal to the part, if any, of the excess paid by the lessor to the lessee:
              1. is less than the amount determined for the first specified lease under subsection (4)(a), and the lessee is required to make a further payment to the lessor equal to the difference between the guaranteed residual value for the lease value, and the value of the consideration, the amount determined is reduced by the amount of the further payment.

                1. Despite subsection (6), if the value of the consideration on the sale, assignment, or lease is more than the amount determined under subsection (4), the part, if any, of the excess that is not paid to the lessee is treated as income under section CZ 20 (Disposal of personal property lease asset under specified lease).

                2. If the lessee under a specified lease, or another person who is associated with the lessee, at any time acquires the personal property lease asset, and disposes of the asset, and the value of the consideration for the disposal is more than the value of the consideration for which the lessee or other person acquired it, an amount equal to the excess is income under section CZ 20.

                3. In this section, and in section FZ 3, outstanding balance means the amount calculated using the formula—

                  loans advanced + interest payable − instalments.

                  Where:

                  • In the formula,—

                  • loans advanced is the total amount of all loans advanced under the lease by the lessor for the period—
                    1. starting on the date that the lease started; and
                      1. ending on the date immediately before the start of the instalment period:
                      2. interest payable is the total amount of interest payable for each loan for the period—
                        1. starting on the date that the lease started; and
                          1. ending on the date immediately before the start of the instalment period:
                          2. instalments is the total amount of all instalments paid by the lessee in the period—
                            1. starting on the date that the lease started; and
                              1. ending on the date immediately before the start of the instalment period.

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