Private ruling: Deduction for lease payments
Published: July 2012
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 2010

Ruling: Q1: Can you claim a deduction for the car expenses that you pay? | A1: No

Relevant facts and circumstances: You are employed in the construction industry. Your salary package includes a motor vehicle allowance. This is paid for you to provide your own vehicle and not use a work vehicle. You were receiving this allowance prior to the purchase of your work car. In 2010 you brought a car through a lease agreement. At this time you also entered into a vehicle lease novation deed with yourself, the finance company and your employer. The agreement provides for the employer to take on the benefits and liabilities of the lease from the employee. You are making the lease payments direct to the finance company and your employer is not making any payments and is not reimbursing you. You pay all running costs for the vehicle. You use the utility only for work purposes and you have another car that you use for private use.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 paragraph 8-1(2)(d). | Income Tax Assessment Act 1936 section 51AF

Reasons for decision: Summary: Taxation Ruling TR 1999/15 sets out the Taxation Office view on novated leases. A novated lease is an arrangement where the three parties (lessor, lessee and the employer) agree to change or transfer the rights and obligations in a motor vehicle lease entered into by two of the parties. Under novation, the lease obligations are transferred to the employer. Accordingly there are no income tax consequences for the employee during the period when the lease payments are made. The employer becomes the lessee and is entitled to a deduction for lease expenses where the vehicle is provided to an employee as part of a salary packaging arrangement (paragraphs 26 and 27 of TR 1999/15). Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent that they are outgoings of a capital private or domestic nature. However, paragraph 8-1(2)(d) of the ITAA 1997 provides that a loss or outgoing is not deductible if a provision of 'this Act' prevents the deduction. 'This Act' is defined to include the Income Tax Assessment Act 1936 (ITAA 1936) (section 995-1 of the ITAA 1997). Section 51AF of the ITAA 1936 provides that where an employer provides a car for the exclusive use of an employee (or a relative of the employee) and the employee is allowed to use the car for private purposes, expenses incurred by the employee (or relative of the employee) in connection with the car are not deductible. In your case you have entered into an agreement with your employer and a finance company under which your employer has taken on the rights and responsibilities of the lease of a car that you use. This is considered to be a novated lease within the scope envisaged in TR 1999/15. Accordingly the lease expenses and running costs are considered to be the expenses of the employer. As the car is being provided for you by your employer for your exclusive use, for both work and private purposes, you are not entitled to a deduction for the motor vehicle expenses you pay, including lease payments, under section 8-1 of the ITAA 1997 as section 51AF of the ITAA 1936 prevents the deduction.

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