ATO Interpretative Decision
ATO ID 2003/762
Income Tax
Capital Allowances: balancing adjustment event - acquisition of car by employee at 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.
This ATOID provides you with the following level of protection:
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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) if, at the end of a novated lease arrangement, the employee acquires the car from the lessor?
Decision
Yes. A balancing adjustment event occurs for the car under paragraph 40-295(1)(a) of the ITAA 1997 because the acquisition of the car by the employee causes the lessor to stop 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. At the end of that time the employee acquired the car from the lessor finance company for its residual value.
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Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the ITAA 1997) applies to the lease of a luxury car.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 taxpayer did not hold the car because the lease had also ended. Instead, 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 finance company stopped holding the car because, on the acquisition of the car by the employee, it was no longer the legal owner of the car under item 10 of the table in section 40-40 of the ITAA 1997.
Accordingly, a balancing adjustment event occurred under paragraph 40-295(1)(a) of the ITAA 1997 for the car held by the finance company at the time the employee acquired the car from the finance company.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 7 August 2018 | Reasons for Decision | Legislation repealed on 1 July 2010. New Legislataive reference inserted. |
Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
Former Division 42A of 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 2003/761
Keywords
Balancing adjustment event
Capital Allowances CoE
Hold a depreciating asset
Luxury cars
Luxury car lease
Date reviewed: 2 February 2018
ISSN: 1445-2782
| Date: | Version: | |
| 5 August 2003 | Original statement | |
| You are here | 7 August 2018 | Updated statement |