“The government has listened to concerns about the proposed changes and has come up with a new treatment for leases entered into before 20 June 2007, when the changes were announced,” Finance Minister Michael Cullen and Revenue Minister Peter Dunne stated.

“Our modifications to the transitional arrangements represent a pragmatic compromise that deters aggressive tax minimisation schemes and recovers some lost revenue while limiting the negative effects on existing commercial arrangements," they claimed.

As originally conceived, the changes would have required all operating leases entered into before 20 June 2007 that met the amended definition of ‘finance lease’ to be reclassified as such from the beginning of the next income year. Parties who had entered into the affected leases would have had to pay back excess depreciation they had previously claimed for the assets involved.

The modification announced on Tuesday reduces allowable depreciation deductions over the whole term of affected leases by one-sixth. That means that the parties involved will have to pay back one-sixth of the depreciation they claim for the life of the leases.

The ministers continued:

“In the government’s view, this transitional arrangement achieves a balance between the need to recognise that some of the affected schemes are commercial realities that involve more than one party and the necessity of deterring people from entering other tax-driven schemes."

“We are also recommending four minor modifications to the proposed legislation to ensure it is correctly targeted and prevent unintended consequences."

Cullen and Dunne added:

“We are confident that these modifications to the proposed legislation will allow a less disruptive transition to the new rules for parties involved in leases that existed before 20 June, while allowing the previously announced changes to achieve their intended purpose."

Announced on 20 June 2007, the proposed changes to the finance lease tax rules were later withdrawn from the taxation bill to allow the government more time to consider transitional concerns that had been raised in submissions to the Finance and Expenditure Committee.