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 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) 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Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the ITAA 1997) applies to the lease of a luxury car.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.

Date of decision:  5 August 2003

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)

Income Tax Assessment Act 1997
   section 40-40
   paragraph 40-295(1)(a)
   Division 242

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

Related ATO Interpretative Decisions
ATO ID 2003/759
ATO ID 2003/760
ATO ID 2003/761

Keywords
Balancing adjustment event
Capital Allowances CoE
Hold a depreciating asset
Luxury cars
Luxury car lease

Siebel/TDMS Reference Number:  338802; 1-5FOYZNW; 1-DMKMN3R

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  22 August 2003
Date reviewed:  2 February 2018

ISSN: 1445-2782

history
  Date: Version:
  5 August 2003 Original statement
You are here 7 August 2018 Updated statement

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