Edited version of private advice

Authorisation Number: 1012677099988

Ruling

Subject: Lease shortfall payments

Question

Are you entitled to a deduction for a lease shortfall on the car?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You entered into a salary sacrifice arrangement (SSA) with your employer in early 2011 for the provision of a car.

After you ceased working for your employer in late 2011, the rights and obligations for the car reverted to you.

After you ceased working for the employer you did not make any lease payments.

The car was repossessed in mid-2012 and was subsequently sold by the credit provider for less than the outstanding lease balance in the 2012-13 financial year.

You were notified of a shortfall in the lease in the 2012-13 financial year which you are required to repay.

You are paying off the lease shortfall over a period of time.

You started a new job in mid 2012 and used the car partly for business purposes prior to it being repossessed soon after.

As the car was repossessed in the 2011-12 financial year you did not have any use of the car in the 2012-13 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 28

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Lease shortfall payments are covered in Income Tax Ruling IT 2420 Income Tax: Deduction for lease shortfall payment on disposal of motor vehicle and Income Tax Ruling IT 2287 Income Tax: Deductions for lease shortfall payments.

Where a lease agreement, which is otherwise acceptable as a normal commercial leasing transaction, makes provision for a lessee to indemnify a lessor against an actual loss incurred after termination of an original or renewal lease on the sale of goods, shortfalls of this nature are allowable deductions where the leased goods have been used by the lessee in the production of assessable income. To the extent that the leased goods have not been so used the shortfall is not deductible.

Therefore where a motor vehicle is partly used for business purposes, the lease shortfall payment may be partly deductible.

A lease shortfall payment is considered to be part of car expenses claimable under Division 28 of the Income Tax Assessment Act 1997 (ITAA 1997)

Section 28-12 of the ITAA 1997 provides that a deduction for car expenses can be made using one of 4 methods if the taxpayer owned or leased a car or hired a car under a hire purchase agreement.

In your case, once you ceased work with your first employer the rights and obligations of the car you held under a SSA reverted back to you. You are then considered to lease the car.

You are not considered to have leased the car during the period that you elected to salary sacrifice in respect of the vehicle. For this period you received less salary (and paid less tax) but instead received the right to use the motor vehicle which was a benefit subject to Fringe Benefits Tax. Any expenses in respect for the car for this period were not incurred in the production of your assessable income.

You ceased work with your first employer in the 2011-12 financial year and the shortfall arose in the 2012-13 financial year. The car was repossessed and the lease shortfall arose in the 2012-13 financial year. Therefore you did not use the car for business purposes in the 2012-13 financial year.

As you did not use the car for business purposes in the 2012-13 financial year, you would not be entitled to include any amount of the lease shortfall as a car expense.

You contended that Taxation Ruling TR 2004/4 Income tax: deductions for interest incurred prior to the commencement of, or following the cessation of, relevant income earning activities may have applied to your circumstances. TR 2004/4 examines the deductibility of interest after the cessation of the income earning activities. The ruling provides that you may still be entitled to a deduction for recurrent interest expenses incurred after the cessation of your previous income earning activity. This ruling considers the deductibility of expenses under section 8-1 of the ITAA 1997.

In your case, the deductibility of the lease shortfall falls for consideration under Division 28 of the ITAA 1997 and not section 8-1 of the ITAA 1997. The shortfall is not considered to be interest or a recurrent expense albeit you are repaying the amount over a period. It is not considered that TR 2004/4 applies in your circumstances.

As you did not hold or lease the car in the year you incurred the lease shortfall, the shortfall amount cannot fall under Division 28 of the ITAA 1997. As you had no business usage of the car in the year the shortfall was incurred you are not entitled to a deduction for the shortfall amount.