ATO ID 2003/760: Capital Allowances: balancing adjustment event - novation of luxury car lease following termination of earlier novation
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) if, following the early termination of a novation arrangement with one employer, the employee novated the car lease to another employer?

Decision
Yes. A balancing adjustment event does occur for the car under paragraph 40-295(1)(a) of the ITAA 1997 because the second novation causes the employee lessee to stop 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. The novation arrangement was terminated 12 months later because the employee ceased to be employed by the employer. Following the employee's engagement by another employer, the taxpayer fully novated the lease to the new employer.

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Summary: Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the ITAA 1997) applies to the lease of a luxury car.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 this case, the first employer was the holder of the car under item 1 of the table in section 40-40 of the ITAA 1997 until the novation arrangement was terminated. When the first novation arrangement was terminated because the employee ceased to be employed by the first employer, that 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 first employer stopped holding the car because item 1 of the table in section 40-40 of the ITAA 1997 no longer applied. Instead, the employee, as the lessee of the luxury car, started to hold the car under item 1 of the table in section 40-40 of the ITAA 1997. When the employee fully novated the lease to the second employer, the second employer became the lessee of the car for the purposes of former Division 42A of former Schedule 2E to the ITAA 1936 and, for the reasons described above, the holder of the car under item 1 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 employee stopped holding the car when there was a fully novated lease with the second employer. Accordingly, a balancing adjustment event occurred under paragraph 40-295(1)(a) of the ITAA 1997 for the car held by the employee at the time the employee fully novated the lease to the second employer.

Legislative references: Income Tax Assessment Act 1936 Former Division 42A of 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 2003/761 | ATO ID 2003/762
Subject references: Balancing adjustment event Capital Allowances CoE Hold a depreciating asset Luxury cars Luxury car leases