ATO Interpretative Decision
ATO ID 2003/756
Income Tax
Capital Allowances: balancing adjustment event - end of non-novated luxury car lease termFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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) on the expiration of the lease in the circumstances of section 242-85 of the ITAA 1997?
Decision
No. Even though the lessee changes from being a holder of the car under item 1 of the table in section 40-40 of the ITAA 1997 to being a holder of the car under item 10 of that table, a balancing adjustment event under paragraph 40-295(1)(a) of the ITAA 1997 does not occur for the car because the lessee does not stop holding it.
Facts
The taxpayer is the lessee of a luxury car with the effect that Division 242 of the ITAA 1997 applies to the arrangement. The taxpayer and the lessor are the only parties to the arrangement which does not involve full or partial novation as described in Taxation Ruling TR 1999/15. At the end of the lease term, the taxpayer acquired the car from the lessor for an amount equal to the residual value of the car. As a result, the provisions of section 242-85 of the ITAA 1997 apply.
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Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the ITAA 1997) applies to the lease of a luxury car.
Under subsection 242-15(2) of the ITAA 1997 (formerly subsection 42A-15(2) of former Schedule 2E to the ITAA 1936), the lessee is taken to own the car until the lease ends. During that period of 'ownership', the lessee is the holder of the car under item 1 of the table in section 40-40 of the ITAA 1997.
As the lease term has ended, the 'ownership' period under subsection 242-15(2) of the ITAA 1997 has ceased and item 1 of the table in section 40-40 of the ITAA 1997 no longer applied from that time.
On the acquisition of the car, the lessee becomes the holder of it under item 10 of the table in section 40-40 of the ITAA 1997. However, section 242-85 of the ITAA 1997 (formerly section 42A-85 of former Schedule 2E to the ITAA 1936) provides that where, at the end of the lease, 'an amount is paid to the lessor by, or on behalf of, the lessee to acquire the car', the lessee is taken to continue to be the owner of the car until the lessee disposes of it (see subparagraph 242-85(c)(i) of the ITAA 1997; formerly paragraph 42A-85C of former Schedule 2E to the ITAA 1936). The effect of this provision is to provide a continuous holding of the car by the lessee.
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. The change from the taxpayer being a holder as lessee under item 1 of the table in section 40-40 of the ITAA 1997 to being a holder as owner under item 10 of the table in section 40-40 of the ITAA 1997 does not, in this case, cause the taxpayer to stop holding the car at any time because the effect of subparagraph 242-85(c)(i) of the ITAA 1997 is to provide a continuous holding of the car by the taxpayer.
Consequently, no balancing adjustment event occurred for the car under paragraph 40-295(1)(a) of the ITAA 1997.
Amendment History
| Date of Amendment | Part | Comment |
|---|---|---|
| 9 April 2020 | Issues
Facts Reason for Decision Legislative references |
Legislation repealed on 1 July 2010. New Legislative references inserted. |
Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
Former Division 42A of former Schedule 2E (repealed on 1 July 2010)
section 40-40
paragraph 40-295(1)(a)
Division 242
subsection 242-15(2)
section 242-85
subparagraph 242-85(c)(i)
Related Public Rulings (including Determinations)
Taxation Ruling TR 1999/15
ATO ID 2003/757 (Withdrawn)
Keywords
Balancing adjustment event
Capital Allowances
Luxury cars
Luxury car lease
Date reviewed: 24 March 2020
ISSN: 1445-2782
| Date: | Version: | |
| 5 August 2003 | Original statement | |
| You are here | 9 April 2020 | Updated statement |