Taxation Determination

TD 94/7

Income tax: does section 82KZM apply to a prepayment equal to 12 months lease instalments where the prepayment does not reduce subsequent lease instalments?

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FOI status:

may be releasedFOI number: I 1216928

This Determination, to the extent that it is capable of being a 'public ruling' in terms of Part IVAAA of the Taxation Administration Act 1953 , is a public ruling for the purposes of that Part. Taxation Ruling TR 92/1 explains when a Determination is a public ruling and how it is binding on the Commissioner. Unless otherwise stated, this Determination applies to years commencing both before and after its date of issue. However, this Determination does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Determination (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

1. No. Section 82KZM of the Income Tax Assessment Act 1936 applies to expenditure incurred in return for the doing of something under an agreement which will not be completed within 13 months after the day the expenditure was incurred.

2. The prepayment of lease instalments represents an advance payment for services (that is, use of the leased asset) that are to be wholly provided within thirteen months from the date of the payment. Where a lease agreement stipulates that a lessee is to make prepayments of lease instalments, and the prepayment does not have the effect of reducing subsequent lease instalments, section 82KZM does not apply to apportion the deduction over the period of the lease.

Example:

Mr Lee Sea entered into a 5 year lease on 1 July 1992, with monthly lease instalments of $1,000. From July 1992, Mr Sea pays $1,000 each month under the lease agreement, however in June 1993 he decides to make a prepayment of lease instalments. Accordingly, he pays $13,000 being $1,000 for the June 1993 instalment and $12,000 being a prepayment for the next 12 months. In July 1993 and subsequent months, Mr Sea continues to pay instalments of $1,000 12 months in advance. During the 1996/97 financial year, the year before the lease is due to expire, Mr Sea does not make any lease payments (referred to as a 'holiday period').

Under these circumstances, section 82KZM will not apply to the prepayment.

The $12,000 represents a prepayment of lease instalments up to June 1994. As Mr Sea has incurred the expenditure in relation to services that are to be provided within 13 months (that is, use of the leased asset), section 82KZM has no application. The same principle applies to subsequent monthly instalments. For example, the monthly payment made in July 1993 is in effect a prepayment for the July 1994 lease instalment. This payment is also for services to be provided within the 13 month time limit specified in section 82KZM, and therefore the section will not apply.

Commissioner of Taxation
20 January 1994

Previously issued as Draft TD 93/D273.

References

ATO references:
NO TOW 34

ISSN 1038 - 8982

Related Rulings/Determinations:

93117
93118
93119

Subject References:
Prepayments
Leases

Legislative References:
ITAA 82KZM

TD 94/7 history

	Date:	Version:	Change:
You are here	20 January 1994	Original ruling
	30 September 1998	Withdrawn

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