ATO Interpretative Decision
ATO ID 2003/761
Income Tax
Capital Allowances: balancing adjustment event - end of novated luxury car lease arrangementFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does a balancing adjustment event occur for a luxury car under paragraph 40-295(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) at the end of a novation arrangement between an employee and employer?
Decision
Yes. A balancing adjustment event does occur for the car under paragraph 40-295(1)(a) of the ITAA 1997 because, at the end of the novation arrangement, the employer stops holding the car.
Facts
The taxpayer entered into a three year finance lease of a luxury car. The taxpayer, an employee, also entered into an arrangement with their employer to fully novate the lease. Both the novation arrangement and the lease agreement operated for their full term.
Reasons for Decision
Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the lease of a luxury car. Ordinarily, the taxpayer, as the lessee of a luxury car, is the holder of the car pursuant to item 1 of the table in section 40-40 of the ITAA 1997.
Under a fully novated lease, however, the employer is the lessee of the car for the purposes of former Division 42A of former Schedule 2E to the ITAA 1936. In that case, the employer is the holder of the car under item 1 of the table in section 40-40 of the ITAA 1997.
At the end of the novation arrangement, the employer stopped being the lessee of the car for the purposes of former Division 42A of former Schedule 2E to the ITAA 1936. Consequently, the employer stopped holding the car because item 1 of the table in section 40-40 of the ITAA 1997 no longer applied. The employee did not hold the car during the lease period. At the end of the novated lease period, the finance company, as the legal owner of the luxury car, started to hold the car under item 10 of the table in section 40-40 of the ITAA 1997.
A balancing adjustment event occurs for a depreciating asset under paragraph 40-295(1)(a) of the ITAA 1997 if a holder of the asset stops holding it. In this case, the employer stopped holding the car because the novation arrangement that caused them to hold it had ended.
Accordingly, a balancing adjustment event occurred under paragraph 40-295(1)(a) of the ITAA 1997 for the car held by the employer at the time the novation arrangement ended.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 24 May 2019 | Reason for Decision | Legislation repealed on 1 July 2010. New Legislative reference inserted |
| Legislative references | Inserted Division 242 of the ITAA 1997 |
Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
Former Division 42A of former Schedule 2E (repealed on 1 July 2010)
section 40-40
paragraph 40-295(1)(a)
Division 242
Related Public Rulings (including Determinations)
Taxation Ruling TR 1999/15
ATO ID 2003/759
ATO ID 2003/760
ATO ID 2003/762
Keywords
Balancing adjustment event
Capital Allowances CoE
Hold a depreciating asset
Luxury cars
Luxury car lease
Date reviewed: 14 May 2019
ISSN: 1445-2782
| Date: | Version: | |
| 5 August 2003 | Original statement | |
| You are here | 24 May 2019 | Updated statement |