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FZ 2: Effect of specified lease on lessor and lessee
or “How specified leases are treated for tax purposes”
You could also call this:

“How the owner's income is calculated for special lease agreements”

When you lease something under a special type of agreement called a ‘specified lease’, the money the owner gets from you is treated like interest. Here’s how it works:

The amount of interest is calculated during the lease period. It’s worked out for the first part of the lease (called the initial period) and then for each payment period after that. There are two ways to do this calculation:

One way is to look at how much you still owe at the start of each period and work out the interest on that. The other way uses methods that businesses commonly use, which take into account how long the lease is and how often you make payments.

The total amount of interest for the whole lease is equal to all the payments you’ll make, plus any guaranteed leftover value, minus the cost of the item you’re leasing.

For each year, the owner counts as income the total of all the interest calculated for periods that end in that year.

In this law, the ‘initial period’ means the time from when the lease starts until just before your first regular payment is due. The ‘instalment period’ is the time between one payment and the next.

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Next up: FZ 4: Deductions under specified leases

or “Rules for claiming expenses under certain types of leases”
Next

Part F Recharacterisation of certain transactions
Terminating provisions

FZ 3Income of lessor under specified lease

  1. The income of a lessor derived under a specified lease is treated as interest.

  2. The amount of interest derived under subsection (1) is treated as—

  3. during the term of the lease, derived during the initial period and each instalment period, an amount that is calculated either,—
    1. on the outstanding balance for the initial period, and each instalment period, at such a rate and in such a manner that the aggregate of all of the amounts so calculated is equal to the amount first mentioned in paragraph (b); or
      1. for the initial period and each instalment period, under such other method commonly applied in commercial usage as, having regard to the term of the lease and to the frequency of the personal property lease payments, results in the allocation to that initial period and to each instalment period of an amount that is fair and reasonable and results in the sum of all amounts so allocated being equal to the amount first mentioned in paragraph (b):
      2. in relation to the term of the lease, an amount that is equal to the sum of the personal property lease payments under the specified lease and the amount of the guaranteed residual value, if any, under the specified lease, reduced by the cost price of the personal property lease asset.

        1. The interest derived by a lessor is, for an income year, treated as an amount equal to the sum of the amounts calculated under subsection (2)(a) as calculated for the initial period, if any, and each instalment period that ends in the income year.

        2. In this section,—

          initial period means the period—

          1. starting on the date of the start of a lease; and
            1. ending just before the start of the instalment period that follows the start of the lease

              instalment period means the period—

              1. starting on the day on which an instalment is payable; and
                1. ending with the day just before the day on which the next instalment is payable.

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