ATO Interpretative Decision

ATO ID 2001/69 (Withdrawn)

Income Tax

• This ATO ID is withdrawn because it contains a view in respect of a provision of the Income Tax Assessment Act 1936 that does not apply after the 2009-2010 income year. Despite its withdrawal, this ATO ID continues to be a precedential ATO View in respect of decisions for income years up to, and including, the 2009-2010 income year.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Whether an operating lease for a motor vehicle entered into by a taxpayer is a lease for taxation purposes. If the retail cost price of the car is greater than the relevant car depreciation limit, whether the car is a 'luxury car' as defined in Income Tax Assessment Act 1936 Schedule 2E , section 42A-120 even though the total rent payable under the lease is less than the depreciation limit.

Decision

The operating lease is a lease for taxation purposes and the car is a 'luxury car' as defined in Income Tax Assessment Act 1936 Schedule 2E, section 42A-120

Facts

The taxpayer enters into a fixed term arm's length operating lease for a motor car after 20 August 1996. The lease is a genuine operating lease: the lessee has no right nor any expectation to purchase the car at the end of the lease, there is no residual value, and the lessor bears any economic loss on disposal. The lease is not a 'short term hiring agreement' as defined in Income Tax Assessment Act 1936 Schedule 2E, section 42A-115. The retail market value of the car is in excess of the relevant car depreciation limit (Income Tax Assessment Act 1997 section 42-80), however, the total rent payable under the lease is less than the car depreciation limit. The lease does not state an amount as the cost or value of the car for the purposes of the lease.

Reasons For Decision

A genuine operating lease is a lease for legal, taxation and accounting purposes. A genuine operating lease does not need to comply with the guidelines set out in Taxation Ruling IT 28 to be a lease for taxation purposes. The guidelines contained in Taxation Ruling IT 28 are directed towards finance leases. Income Tax Assessment Act 1936 Section Schedule 2E, section 42A-120 provides that a 'leased car' is a 'luxury car' if, had the lessee bought the car from the owner for an amount equal to the amount set out in Income Tax Assessment Act 1936 Schedule 2E, paragraph 42A-20(1)(b) at the first time when the owner granted a lease of the car, the cost of the car for depreciation purposes would have been reduced by the operation of Income Tax Assessment Act 1997 section 42-80 (which sets out the car depreciation limit). Income Tax Assessment Act 1936 Schedule 2E, section 42A-115 defines 'leased car' to mean a motor car of which a lease has been granted. This definition of 'leased car' applies equally to cars leased under finance leases and cars leased under operating leases.

The amount set out in Income Tax Assessment Act 1936 Schedule 2E, paragraph 42A-20(1)(b) is the amount the lessee could reasonably be expected to have paid for the purchase of the car if the lessor actually sold the car to the lessee when the lease was granted, and the lessor and lessee dealt with each other at arm's length in connection with the sale. This amount is to be ascertained by reference to the time 'when' the lease was granted. 'When' the lease was granted in this context should be interpreted as meaning the time immediately before the lease was granted. The amount the lessee would have paid for the car accordingly is equal to the retail market value of the car at the time immediately before the lease was granted (i.e., the retail market value of the unencumbered car).

The amount the lessee would have paid for the car is not the retail market value of the car taking into account the fact that the car is being leased. The purpose of the legislation is to determine the value of the car, not the value of the reversionary leasehold interest of the lessor in the car, nor the value of the rights conferred upon the lessee pursuant to the lease.

As the retail market value of the car is in excess of the relevant car depreciation limit, the car is a luxury car for the purposes of Income Tax Assessment Act 1936 Schedule 2E, section 42A-120 .

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2E
   paragraph 42A-20(1)(b)
   section 42A-115
   section 42A-120

Related Public Rulings (including Determinations)
IT 28

Keywords
Leasing
Vehicle leasing and hire

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  15 June 2001

ISSN: 1445-2782