Senate

Supplementary Explanatory Memorandum

(Circulated by the authority of the Treasurer the Hon Ralph Willis, M.P.)

Chapter 1 Leases of luxury cars

1.1 This amendment removes clauses 24 and 25 from the Bill [Amendment 1] .

1.2 These clauses were introduced to prevent the use of the Citibank decision to avoid the depreciation limit on luxury cars.

1.3 Section 57AF of the Income Tax Assessment Act limits the depreciable cost of motor cars and station wagons to a certain price for taxation purposes. The depreciation cost limit, which is indexed each year, is $48,415 for the year ending 30 June 1994.

1.4 When a car is leased, the lessor, being the owner of the car, normally claims depreciation on that car, subject to the depreciation limits, as a deduction against the lease payments received from the lessee. However, Justice Beaumont of the Federal Court decided in the case of Citibank Ltd. v. Federal Commissioner of Taxation, that Citibank Ltd. could use the finance method to return lease income received from finance leases of luxury cars, without adjusting its assessable income to reflect the section 57AF depreciation cost limit. Under the finance method, the lease is treated as if it were a loan from the lessor to the lessee, with lease payments dissected on an actuarial basis into a principal component and an interest component. Only the interest component is brought to account as income in the lessor's hands.

1.5 To counter this decision, the Treasurer announced on 8 July 1993 that the legislation would be amended.

1.6 The Full Federal Court overturned the decision of Justice Beaumont in September 1993, holding that the lessor should treat the gross rentals as assessable income and deduct depreciation from assessable income. The Court accepted that the same result could be achieved by adding an additional amount to income returned using the finance method.

1.7 As Citibank was seeking leave to appeal against the decision to the High Court, clauses 24 and 25 were inserted into Taxation Laws Amendment Bill (No. 4) 1993, which was introduced in December 1993. Special leave to appeal to the High Court was denied on 11 February 1994.

1.8 As the final legal position requires lessors who use the finance method to account for lease income to take account of the depreciation limit on luxury cars in returning their taxable income, the proposed amendment is no longer considered to be necessary.