Leased luxury cars
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
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A leased car, either new or second hand, is a luxury car if its cost exceeds the car limit that applies for the income year in which the lease commences. The car limit for 2001-02 is $55 134-see Car limit for certain motor vehicles.
A luxury car lease (other than a genuine short-term hire arrangement) entered into after 7.30 pm (by legal time in the ACT) on 20 August 1996 is treated as a notional sale and loan transaction.
The cost or value of the car specified in the lease (or, if the parties were not dealing at arm's length, the amount that could reasonably have been expected to have been paid to purchase the car) is taken to be the cost of the car to the lessee and the amount loaned by the lessor to the lessee to buy the car.
In relation to the notional loan transaction, the actual lease payments are divided into notional principal and finance charge components. That part of the finance charge component applicable for the particular period (the 'accrual amount') is deductible to the lessee.
In relation to the notional sale transaction, the lessee is treated as the holder of the luxury car and is entitled to claim a deduction for the decline in value of the car. For the purpose of calculating the deduction, the cost of the car is limited to the car limit for the year in which the lease is granted.
Any deduction would be reduced to reflect any use of the car other than for a taxable purpose, such as private use.
If the lessee does not actually acquire the car from the lessor when the lease terminates, the lessee is treated under the rules as disposing of the car by way of sale to the lessor. This constitutes a balancing adjustment event and any assessable or deductible balancing adjustment amount for the lessee must be determined-see What happens if you no longer hold or use a depreciating asset?.
Last modified: 01 Jun 2005QC 27399