A leased car, either new or second-hand, is generally a luxury car if its cost exceeds the car limit that applies for the financial year in which the lease is granted. The car limit for 2006-07 is $57,009 - see Car limit.
For income tax purposes, a luxury car lease (other than a genuine short-term hire arrangement) is treated as a notional sale and loan transaction.
Any cost or value specified in the lease (or else the amount that would have been the arm's length cost had the lessor sold the car to the lessee when the lease was granted) 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.
The actual lease payments made by the lessee are divided into notional principal and finance charge components. That part of the finance charge component applicable to the particular period may be deductible to the lessee.
The lessee is generally 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 must 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 or ends, the lessee is treated as if they sold the car to the lessor. The lessee will need to work out any assessable or deductible balancing adjustment amount - see What happens if you no longer hold or use a depreciating asset?