Deduction for Sale and Lease back
Whether company X could get deduction in respect of 2m of lease payment and whether Y could get deduction for depreciation of 2m in respect of the plant.
Advises to X
Are the factory and plant fixture?
Commissioner may argue that factory and plant consisted of fixtures, sale agreement is ineffective to vest any title in company Y. Therefore, the lease is ineffective to confer any right in respect of the factory and plant on the taxpayer. Accordingly, payments made by company X to Y cannot be characterized as payments made under a lease for the purpose of securing the right to use property owned by company Y as lesser.
The words is frequently cited on this issue as:
" whether a chattel has become a fixture depends upon whether it has been fixed to land and if so for what purpose.
The test of whether a chattel which has been to some extent fixed to land is a fixture is whether is has been fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period...or whether it has been fixed with the fixture, whether it has been fixed with the intent that it shall remain in position only for some temporary purpose... "
Based on present case, X Co is operating in fertilizer industry, which requires heavy items for conducting business. So it is highly unlikely to remove attached machinery with the next ten years and the intention of affixing these equipments can be concluded as remaining in place indefinitely rather than for purpose of a limited, life span. Whilst the Plant may need to be replaced from time to time, in line with technological changes, there was no suggestion that the...