Tax Laws Amendment (Transfer of Provisions) Act 2010 (79 of 2010)
Schedule 3 Leases of luxury cars
Part 1 Main amendments
Income Tax Assessment Act 1997
2 After Division 240
Insert:
Division 242 - Leases of luxury cars
Table of Subdivisions
Guide to Division 242
242-A Notional sale and loan
242-B Amount to be included in lessor's assessable income
242-C Deductions allowable to lessee
242-D Adjustments if total amount assessed to lessor differs from amount of interest
242-E Extension, renewal and final ending of the lease
Guide to Division 242
242-1 What this Division is about
A luxury car is one whose market value exceeds the car limit set for a car's capital allowance deductions by section 40-230.
If the lessor of a luxury car is tax exempt, or taxed at a lower rate than the lessee, the lease could be structured to give both parties a better after-tax outcome than if the lessee had bought the car. The lessee could fully deduct the lease payments, thereby avoiding the capital allowance limit for luxury cars, and the lessor would receive higher lease payments.
This Division removes the tax benefit for the lessee by putting both parties in the same position as if the lessor had sold the car to the lessee and lent the lessee the purchase price.
Subdivision 242-A - Notional sale and loan
Guide to Subdivision 242-A
242-5 What this Subdivision is about
A leased luxury car is treated for income tax purposes as if it had been sold by the lessor to the lessee for the car's market value. The lessor is treated as having lent the lessee the money to buy the car, and the lease payments are treated as payments of the principal and interest on that notional loan.
Table of sections
Operative provisions
242-10 Application
242-15 Notional sale and acquisition
242-20 Consideration for notional sale, and cost, of car
242-25 Notional loan by lessor to lessee
Operative provisions
242-10 Application
(1) This Division applies to a*car that:
(a) is leased (but not under a*short-term hire agreement or a*hire purchase agreement) for consideration; and
(b) was a*luxury car when the lessor first leased it; and
(c) is not*trading stock of the lessee; and
(d) is not a car covered by subsection 40-230(2) (about cars modified to carry individuals with a disability).
(2) The provisions of this Division do not have effect for the purposes of Division 11A of Part III of theIncome Tax Assessment Act 1936 (about withholding tax on dividends, interest and royalties).
Note: This subsection prevents interest on the notional loan that this Division creates being subject to withholding tax under Division 11A.
(3) For the purposes of paragraph (1)(a), the question whether an agreement is a*short-term hire agreement is determined on the basis that an employee or employer of an entity is an*associate of the entity.
Note: Under the definition of short-term hire agreement in subsection 995-1(1), successive agreements for the hire of the same asset to an entity or its associates are not short-term hire agreements if they result in substantial continuity of hiring.
242-15 Notional sale and acquisition
(1) This Act has effect as if:
(a) the*car had been disposed of (the notional sale ) by the lessor to the lessee; and
(b) the car had been acquired by the lessee;
at the start of the term of the lease.
Note: This Act will apply as it would have if the lessor had actually disposed of the car to the lessee. For example, if the lessor had been deducting an amount for the car's decline in value, the notional disposal will activate the balancing adjustment rules in Subdivision 40-D because the lessor would be treated as no longer holding the car.
(2) This Act also has effect as if the lessee owns the*car until:
(a) the lease (not including any extension or renewal of the lease) ends; or
(b) the lessee enters into a sublease of the car and this Division applies to the car in relation to the sublease.
Note 1: This means that the lessee (and not the lessor) may be able to deduct amounts for the decline in value of the car under Division 40.
Note 2: The lessee will be treated as continuing to own the car until the end of any extension or renewal: see section 242-80.
242-20 Consideration for notional sale, and cost, of car
(1) The consideration for the notional sale by the lessor, and the first element of the*cost of the*car for the lessee, are the car's*market value at the start of the term of the lease.
(2) If:
(a) the lease is a sublease; and
(b) the lessee is one or more of the following:
(i) an*associate of the lessor;
(ii) an employer of the lessor;
(iii) an employee of the lessor;
the first element of the*cost of the*car to the lessee is the sum of:
(c) the amount that would have been the car's*adjustable value at the start of the term of the lease for the purposes of applying this Act to the lessor if the lessor were not taken under this Division to have disposed of the car; and
(d) any amount that is included in the lessor's assessable income under section 40-285 as a balancing adjustment because the lessor is treated as having disposed of the car.
Note: Section 242-20 of theIncome Tax (Transitional Provisions) Act 1997 extends paragraph (2)(d) to cover amounts included in assessable income under former provisions corresponding to section 40-285.
242-25 Notional loan by lessor to lessee
(1) This Act has effect as if, on the grant of the lease, the lessor had made a loan (the notional loan ) to the lessee:
(a) for a period equal to the term of the lease (not including the term of any extension or renewal); and
(b) of an amount (the notional loan principal ) equal to the consideration for the notional sale of the*car less any amount paid, or credited by the lessor as having been paid, by the lessee to the lessor, at or before the start of the term of the lease, for the first element of the*cost of the car to the lessee; and
(c) subject to payment of interest.
Note: There is a further notional loan if the lease is extended or renewed: see section 242-80.
(2) This Act has effect as if the notional loan principal were repaid, and the interest were paid, by the making of the*luxury car lease payments.
Subdivision 242-B - Amount to be included in lessor's assessable income
Guide to Subdivision 242-B
242-30 What this Subdivision is about
The lessor's assessable income includes the interest on the notional loan.
The lease payments to the lessor are non-assessable non-exempt income.
Note: If the consideration for a notional sale of a car exceeds the adjustable value of the car to the lessor, the excess will be included in the lessor's assessable income under section 40-285.
There would be a similar result if the lessor is treated as having reacquired the car and then sells the car for more than the cost of reacquisition.
Table of sections
Operative provisions
242-35 Amount to be included in lessor's assessable income
242-40 Treatment of lease payments
Operative provisions
242-35 Amount to be included in lessor's assessable income
Accrual amounts
(1) The lessor's assessable income for an income year includes:
(a) if a*luxury car lease payment period for the lease of a*car occurs wholly during that income year - the amount (an accrual amount ) worked out under subsection (2) for that luxury car lease payment period; and
(b) if part of a luxury car lease payment period for the lease of a car occurs during that income year - so much of the amount (also an accrual amount ) worked out under subsection (2) for that luxury car lease payment period as may appropriately be related to that income year in accordance with generally accepted accounting principles.
(2) The amount is:
where:
implicit interest rate is the implicit interest rate under the lease for the*luxury car lease payment period, taking into account the payments to be made by the lessee under the lease and any*termination amounts.
outstanding notional loan principal at the start of the lease payment period is:
(a) the sum of the notional loan principal and the accrual amounts for earlier*luxury car lease payment periods; less
(b) the sum of the*luxury car lease payments that the lessee was required to make before the start of the relevant luxury car lease payment period.
Excessive periods
(3) If, apart from this subsection, a*luxury car lease payment period for the lease of a*car would exceed 6 months, this Division applies as if each of the following were a separate luxury car lease payment period:
(a) the first 6 months of the original luxury car lease payment period;
(b) if the original luxury car lease payment period was not longer than 12 months - the remaining part of the original luxury car lease payment period;
(c) if the original luxury car lease payment period was longer than 12 months - each successive 6 month period in the original luxury car lease payment period;
(d) the period (if any) after the end of the last of the periods to which paragraph (c) applies.
242-40 Treatment of lease payments
(1) The*luxury car lease payments under the lease are not assessable income and are not*exempt income of the lessor.
Note: Those lease payments are instead taken into account in calculating accrual amounts that are included in the lessor's assessable income under section 242-35.
(2) In working out the amounts the lessor can deduct for any income year, ignore the fact that subsection (1) makes the*luxury car lease payments*non-assessable non-exempt income.
Note: This allows the lessor to continue to deduct amounts related to earning the lease payments (such as interest on an amount the lessor borrowed to acquire the car), just as if the amounts related to earning interest on the notional loan to the lessee.
Subdivision 242-C - Deductions allowable to lessee
Guide to Subdivision 242-C
242-45 What this Subdivision is about
The lessee is entitled to deduct the interest on the notional loan to the same extent that the lessee would have been able to deduct the lease payments apart from this Division.
Table of sections
Operative provisions
242-50 Extent to which deductions are allowable to lessee
242-55 Lease payments not deductible
Operative provisions
242-50 Extent to which deductions are allowable to lessee
(1) If a*luxury car lease payment period for the lease of a*car occurs wholly during an income year of the lessee, the lessee can deduct the accrual amount for that period for that income year.
Note 1: If a luxury car lease payment period would otherwise be longer than 6 months, subsection 242-35(3) divides the original period into periods of no longer than 6 months.
Note 2: For accrual amount , see subsection 242-35(1).
(2) If part of a*luxury car lease payment period for the lease of a*car occurs during an income year of the lessee, the lessee can deduct so much of the accrual amount for that period as may appropriately be related to that income year in accordance with generally accepted accounting principles.
(3) The lessee can deduct an accrual amount, or part of an accrual amount, for a*luxury car lease payment period under subsection (1) or (2) for an income year only to the extent that the lessee could deduct the luxury car lease payments made for that year apart from this Division.
242-55 Lease payments not deductible
The lessee cannot deduct the*luxury car lease payments that the lessee makes under the lease for any income year.
Note: Those payments are instead taken into account in calculating accrual amounts that are deductible under section 242-50.
Subdivision 242-D - Adjustments if total amount assessed to lessor differs from amount of interest
Guide to Subdivision 242-D
242-60 What this Subdivision is about
When a luxury car lease is extended, renewed or ends, the overall nominal gain to the lessor is compared to the nominal interest so far paid under the lease.
If the overall nominal gain is greater, the difference is assessable income of the lessor, and the lessee may be able to deduct it.
If the overall nominal gain is less, the lessor can deduct the difference, which may also be assessable income of the lessee.
This process ensures that the right amount has been taxed over the term of the lease.
Table of sections
Operative provisions
242-65 Adjustments for lessor
242-70 Adjustments for lessee
Operative provisions
242-65 Adjustments for lessor
(1) This section applies at the following times:
(a) if the term of the lease is extended - when the extension takes effect;
(b) if the lease is renewed - when the renewal takes effect;
(c) when the lease (including any extension or renewal of the lease) ends.
(2) If the sum of all amounts (whether*luxury car lease payments, a*termination amount or any other payments) that were paid or payable to the lessor under the lease exceeds the amount worked out under subsection (4), the excess is included in the lessor's assessable income for the income year in which the relevant time occurs.
Note: Subsection 242-80(8) treats the amount of a notional loan that is taken to be made by an extended or renewed lease to be a termination amount paid under the previous lease.
(3) If the sum of all amounts (whether*luxury car lease payments, a*termination amount or any other payments) that were paid or payable to the lessor under the lease is less than the amount worked out under subsection (4), the lessor can deduct the difference for the income year in which the relevant time occurs.
(4) The amount for the purposes of subsections (2) and (3) is the sum of:
(a) the notional loan principal; and
(b) the sum of the accrual amounts that have been or are to be included in the lessor's assessable income of any income year.
Note: For accrual amount , see subsection 242-35(1).
242-70 Adjustments for lessee
(1) If:
(a) an amount is included in the lessor's assessable income for an income year under subsection 242-65(2); or
(b) an amount would have been so included if the lessor had been subject to tax on assessable income;
the lessee can deduct a corresponding amount for the same income year.
(2) If:
(a) the lessor can deduct an amount for an income year under subsection 242-65(3); or
(b) the lessor could have deducted an amount under that subsection if the lessor had been subject to tax on assessable income;
a corresponding amount is included in the lessee's assessable income for the same income year.
(3) The lessee cannot deduct an amount for any income year under subsection (1), and an amount is not included in the lessee's assessable income of any income year under subsection (2), except to the extent (if any) that the lessee could deduct the*luxury car lease payments made apart from this Division.
Subdivision 242-E - Extension, renewal and final ending of the lease
Guide to Subdivision 242-E
242-75 What this Subdivision is about
When a luxury car lease ends (whether it expires or is terminated before its expiry date), one of 3 things will happen:
(a) if the lease is extended or renewed - the original notional loan is treated as having been repaid and the lessor is treated as having made a new loan to the lessee; or
(b) if the lessee acquires the car from the lessor - the lessee continues to own the car for tax purposes, and the actual transfer and the termination payment to acquire the car are ignored for tax purposes; or
(c) if the lessee's right to use the car ends - the lessee is treated as having sold the car back to the lessor.
In each case, there may be adjustments under Subdivision 242-D to ensure that the right amount has been taxed over the term of the lease.
Table of sections
Operative provisions
242-80 What happens if the term of the lease is extended or the lease is renewed
242-85 What happens if an amount is paid by the lessee to acquire the car
242-90 What happens if the lessee stops having the right to use the car
Operative provisions
242-80 What happens if the term of the lease is extended or the lease is renewed
(1) The rules in this section have effect if, after the end of the lease (or the end of any extension of the lease term or renewal of the lease), the lessee continues to have the*right to use the*car because the term of the lease is extended (or further extended) or the lease is renewed (or further renewed).
(2) This Act has effect as if the lessee continued to be the owner of the*car until the end of the lease as extended or renewed.
(3) However, this Act has effect as if the lessee stopped being the owner of the*car if:
(a) the lessee enters into a sublease in respect of the car; and
(b) this Division applies to the car in respect of that sublease.
(4) This Act has effect as if the notional loan that arose because of the grant of the lease, or because of the previous extension or renewal, had been repaid.
Note: Also, Subdivision 242-D (about balancing adjustments) will apply to the ending, extension or renewal.
(5) This Act has effect as if, on the grant of the extension or renewal, the lessor had made a new loan (the notional loan ) to the lessee:
(a) for the period of the extension of the term of the lease or the period of the renewed lease, as the case may be; and
(b) of an amount (the notional loan principal ) equal to the*car's*market value when the extension or renewal is granted; and
(c) subject to the payment of interest.
(6) This Act has effect as if the notional loan principal were repaid, and the interest were paid, by the making of the*luxury car lease payments under the lease as extended or renewed (or further extended or renewed).
(7) In determining whether subsection (1) applies to the lessee, disregard any period after the end of the lease (or the end of any extension of the lease term or renewal of the lease) and before the extension or renewal (or further extension or renewal) is granted and during which the lessee did not have the*right to use the*car if the extension or renewal (or further extension or renewal):
(a) has effect from the time immediately after the end of that term, extension or renewal; or
(b) otherwise results in substantial continuity of the leasing of the car to the lessee.
(8) The amount of the notional loan is treated, for the purposes of section 242-65 (about the lessor's balancing adjustments), as a*termination amount paid to the lessor under the lease or under the previous extension or renewal.
242-85 What happens if an amount is paid by the lessee to acquire the car
If, at the end of the lease or, if it is extended or renewed, at the end of any extension or renewal (the end time ), an amount is paid to the lessor by, or on behalf of, the lessee to acquire the*car, the following provisions have effect:
(a) the amount paid is not included in the lessor's assessable income;
(b) the lessee cannot deduct the payment;
(c) this Act has effect as if:
(i) the lessee continued to be the owner of the car until the lessee disposes of it; and
(ii) the transfer to the lessee of legal title to the car were not a disposal of the car by the lessor.
242-90 What happens if the lessee stops having the right to use the car
(1) If, at the end time:
(a) the lessee stops having the*right to use the*car; and
(b) no amount is paid to the lessor by, or on behalf of, the lessee to acquire the car;
the following provisions have effect.
Note: For end time , see section 242-85.
(2) This Act has effect as if the*car:
(a) were sold by the lessee to the lessor; and
(b) were acquired by the lessor;
at the end time.
(3) The consideration for the sale of the*car by the lessee, and the first element of the*cost of the car to the lessor, are the*market value of the car at the end time.
(4) If the*car is afterwards acquired by an*associate of the lessee or an employer or employee of the lessee, this Act has effect as if the first element of the*cost of the car as a*depreciating asset were the lesser of:
(a) the sum of:
(i) the amount that would have been the*adjustable value of the car at that time for the purposes of applying this Act to the lessee if the lessee were not treated under this Division as having disposed of the car; and
(ii) any amount that is included in the lessee's assessable income under section 40-285 as a balancing adjustmentbecause the lessee is treated as having disposed of the car; and
(b) the cost of the acquisition of the car by the associate, employer or employee.
Note: Section 242-20 of theIncome Tax (Transitional Provisions) Act 1997 extends subparagraph (a)(ii) to cover amounts included in assessable income under former provisions corresponding to section 40-285.
(5) For the purposes of paragraph (1)(a), the lessee is not treated as having stopped to have the*right to use the*car if:
(a) the term of the lease is extended (or further extended), or the lease is renewed (or further renewed), at a time after, but not immediately after, the end of that term, extension or renewal with effect from the time immediately after that end; or
(b) the extension or renewal (or further extension or renewal) otherwise results in substantial continuity of the leasing of the car to the lessee.