Edited version of private advice

Authorisation Number: 1052319169323

Date of advice: 21 October 2024

Ruling

Subject: Deductions - vehicle expenses

Question

Can you claim a deduction for deprecation and motor vehicle expenses if the vehicle is under a novated lease?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

On XX/XX/20XX, you commenced a novated lease arrangement with your employer.

Novated lease agreement details:

•         Vehicle

•         The employer has offered to assume responsibilities for the leasing of the goods by the financer to the employee.

•         The employee has entered a lease over the goods with the financer.

•         Under the arrangement the employee's obligations under the lease are novated to the employer.

•         The employee will continue to have custody of the goods to undertake specified obligations under the lease.

•         Reduction to take home pay $XXXX per week.

•         Income tax savings $XXXX per week.

•         Business use percentage motor vehicle for work purposes.

•         Gross weekly rental $XXXX

•         Salary sacrifice $XXXX

Relevant legislative provisions

Income Tax Assessment Act 1936 section 51AF

Income Tax Assessment Act 1936 section 51AH

Reasons for decision

Summary

You are not entitled to claim a deduction for the depreciation and motor vehicle expenses whilst the vehicle is under the novated lease arrangement, as you sacrifice these rights under the terms of the arrangement.

Detailed reasoning

Section 51AF of the Income Tax Assessment Act 1936 (ITAA 1936) operates to deny a deduction for car expenses incurred by an employee in relation to a car which is provided by the employer for the exclusive use of the employee and which the employee is entitled to use for private purposes.

Taxation Ruling TR 1999/15 Income Tax and fringe benefits tax: taxation consequences of certain motor vehicle lease novation arrangements explains the Commissioners' view on certain motor vehicle lease novation arrangements.

Paragraph 25. States when full novation agreements occur, the finance lease is novated in full to the employer and al lease obligations are transferred to the employer.

Paragraph 26. There are no income tax consequences for the employee during the period when the employer makes the lease payments.

Paragraph 27. It is outlined that the employer becomes the lessee under the novated lease and is entitled to a deduction for lease expenses where the vehicle is used in the business or provided to an employee as part of a salary package.

TR 1999/5/15 should be read in conjunction with Taxation Ruling IT 2509 Income tax: income tax and fringe benefits tax consequences of an employee leasing a car to an employer which is subsequently provided back to the employee as this further provides the Commissioner's view on motor vehicle lease novation arrangements.

Paragraph 25. Provides that an employee is not allowed an income tax deduction that they incur in relation to the car because of the application of section 51AF and section 51AH of the ITAA 1936.

Paragraph 27. States that in a novation situation, the finance lease between the leasing company and the employee is varied so as to create a contract with the employer that shifts the obligation to make lease payments from the employee to the employer. The employee foregoes the right to receive rent under the sublease and there is no assessable income derived by the employee. Therefore, the employee is not entitled to any deductions in respect of lease payments.

Application to your circumstances

In your case, when you entered a novated lease arrangement with your employer, all the lease obligations for the vehicle transfer to your employer for the period of the lease. Upon agreeing to the terms of the lease, you sacrifice the right to receive rent under the sublease and there is no assessable income derived by you. Therefore, you will not be entitled to any deduction in respect of the lease payments.

Furthermore, as the lease obligations are transferred to your employer under the agreement, you will not be entitled to any associated running and depreciation expenses in relation to the vehicle for the term of the agreement.

Therefore, a deduction is not allowable for the associated car expenses under section 51AF of the ITAA 1936.