ATO ID 2003/762: Capital Allowances: balancing adjustment event - acquisition of car by employee at 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) if, at the end of a novated lease arrangement, the employee acquires the car from the lessor?

Decision
Yes. A balancing adjustment event occurs for the car under paragraph 40-295(1)(a) of the ITAA 1997 because the acquisition of the car by the employee causes the lessor 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. Both the novation arrangement and the lease agreement operated for their full term. At the end of that time the employee acquired the car from the lessor finance company for its residual value.

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Summary: Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the ITAA 1997) applies to the lease of a luxury car.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 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 taxpayer did not hold the car because the lease had also ended. Instead, 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 finance company stopped holding the car because, on the acquisition of the car by the employee, it was no longer the legal owner of the car under item 10 of the table in section 40-40 of the ITAA 1997. Accordingly, a balancing adjustment event occurred under paragraph 40-295(1)(a) of the ITAA 1997 for the car held by the finance company at the time the employee acquired the car from the finance company.

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 2003/760 | ATO ID 2003/761
Subject references: Balancing adjustment event Capital Allowances CoE Hold a depreciating asset Luxury cars Luxury car lease