ATO Interpretative Decision

ATO ID 2003/761

Income Tax

Capital Allowances: balancing adjustment event - end of novated luxury car lease arrangement
FOI status: may be released

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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

Division 42A of Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) 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 Division 42A of 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 Division 42A of 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.

Date of decision:  5 August 2003

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   Division 42A of Schedule 2E

Income Tax Assessment Act 1997
   section 40-40
   paragraph 40-295(1)(a)

Related Public Rulings (including Determinations)
Taxation Ruling TR 1999/15

Related ATO Interpretative Decisions
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

Siebel/TDMS Reference Number:  338802; 1-5FOOOE6

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  22 August 2003
Date reviewed:  8 March 2016

ISSN: 1445-2782

history
  Date: Version:
You are here 5 August 2003 Original statement
  24 May 2019 Updated statement

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