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ATO ID 2008/130 Income Tax Income tax treatment of securitisation of leases

Does an entity that acquires motor vehicles, leases them and assigns all of its rights under the leases including an amount specified as the residual value of the motor vehicles, to a special purpose vehicle under a securitisation arrangement, hold the motor vehicles as trading stock for the purposes of Division 70 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The entity does not, in the circumstances described above, hold the motor vehicles as trading stock for the purposes of Division 70 of the ITAA 1997.

An entity carries on a business of originating leases in motor vehicles and financing the leases through a securitisation arrangement.

The entity acquires motor vehicles from suppliers and leases them for private or business use. Immediately after a lease is entered into with a customer, the entity assigns its rights under the lease, including an amount specified as the residual value of the motor vehicle, to a trust, which is a special purpose securitisation vehicle (the SPV) in consideration for the net present value of those rights. The SPV does not obtain any ownership interest in a motor vehicle by accepting this assignment.

The SPV issues marketable securities which it sells to investors, the proceeds of which it uses to pay the entity for the receivables. The entity uses the payment from the SPV to pay for the vehicles. It derives its income from managing and administering the collection of lease payments over the life of the lease.

Upon termination of a vehicle lease, the vehicle is sold. The entity transfers title to the vehicle to the new owner but the proceeds of the sale belong to the SPV.

The term ‘trading stock’ is defined in section 70-10 of the ITAA 1997 as including anything produced, manufactured or acquired that is held for purposes of manufacture, sale or exchange in the ordinary course of a business.

The definition is not exhaustive and relies on the ordinary meaning of ‘trading stock’, or its alternative expression ‘stock-in-trade’. The ordinary meaning denotes ‘goods held by a trader in such goods for sale or exchange in the ordinary course of his trade’ ( Federal Commissioner of Taxation v. Sutton Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277; (1985) 85 ATC 4398; (1985) 16 ATR 567).

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