ATO ID 2003/761: Capital Allowances: balancing adjustment event - end of novated luxury car lease arrangement
Date of decision: 5 August 2003
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

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) at the end of a novation arrangement between an employee and employer?

Decision
Yes. A balancing adjustment event does occur for the car under paragraph 40-295(1)(a) of the ITAA 1997 because, at the end of the novation arrangement, the employer stops holding the car.

Facts
The taxpayer entered into a three year finance lease of a luxury car. The taxpayer, an employee, also entered into an arrangement with their employer to fully novate the lease. Both the novation arrangement and the lease agreement operated for their full term.

Reasons for decision
Summary: Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the lease of a luxury car. Ordinarily, the taxpayer, as the lessee of a luxury car, is the holder of the car pursuant to item 1 of the table in section 40-40 of the ITAA 1997. Under a fully novated lease, however, the employer is the lessee of the car for the purposes of former Division 42A of former Schedule 2E to the ITAA 1936. In that case, the employer is the holder of the car under item 1 of the table in section 40-40 of the ITAA 1997. At the end of the novation arrangement, the employer stopped being the lessee of the car for the purposes of former Division 42A of former Schedule 2E to the ITAA 1936. Consequently, the employer stopped holding the car because item 1 of the table in section 40-40 of the ITAA 1997 no longer applied. The employee did not hold the car during the lease period. At the end of the novated lease period, the finance company, as the legal owner of the luxury car, started to hold the car under item 10 of the table in section 40-40 of the ITAA 1997. 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. In this case, the employer stopped holding the car because the novation arrangement that caused them to hold it had ended. Accordingly, a balancing adjustment event occurred under paragraph 40-295(1)(a) of the ITAA 1997 for the car held by the employer at the time the novation arrangement ended.

Legislative references: Income Tax Assessment Act 1936 Former Division 42A of former Schedule 2E (repealed on 1 July 2010)
Related public rulings and determinations: Taxation Ruling TR 1999/15
Related ATO interpretative decisions: ATO ID 2003/759 | ATO ID 2003/760 | ATO ID 2003/762
Subject references: Balancing adjustment event Capital Allowances CoE Hold a depreciating asset Luxury cars Luxury car lease