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Chapter 9: Leases and similar arrangements over wasting assets

A case for reform

There is currently no consistent framework for taxing income associated with leases over wasting assets and similar arrangements. As a result, some taxpayers can access tax benefits from: structuring of lease payments, transfer of tax preferences to high-tax lessors, and lease assignments. Complex arrangements also exist in relation to tax exempts.

A strategy for reform

To move towards taxing leases and similar arrangements on a more consistent basis that brings tax values closer to commercial value, subject to practical considerations. The issue of whether or not to permit the transfer of tax preferences also needs to be addressed.

Key policy
How can tax outcomes be made independent of the structure of payments? Should tax preference transfer be permitted or restricted? How could either outcome be achieved? If tax preference transfer is restricted between taxable entities, in what circumstances should this apply? How could tax preference transfer by tax exempts be restricted? How should lease assignments be addressed?
A ‘sale and loan’ treatment of leases.
Option 1
Allow tax preference transfer by applying tax preferred leasing methodology.

Option 2
Deny tax preference transfer by applying ‘sale and loan’ methodology.

Apply ‘sale and loan’ methodology to:
- finance leases; or
- potentially all leases with specified exclusions.
Apply ‘sale and loan’ methodology to similar arrangements undertaken by tax exempts. A number of alternative options exist to replace Division 16D. However, section 51AD can be abolished.
Implement a specific lease assignment measure.