Taxation Ruling IT 2420 - Income tax : deduction for lease shortfall payment on disposal of motor vehicle

What this ruling is about: In a decision handed down by the Administrative Appeals Tribunal (Mr P.M. Roach - Senior Member) on 20 February 1987 a lease shortfall payment incurred on the sale of a leased motor vehicle was held to be an allowable deduction under sub-section 51(1) of the Income Tax Assessment Act. No appeal has been lodged against the decision which has been reported as Case U47, 87 ATC 326.


Ruling: 7. This decision was open to the Tribunal on the facts as disclosed at the hearing. It is consistent with official practice stated in Taxation Ruling No. IT 2287 following the Federal Court decision in FCT v E.A. Marr and Sons (Sales) Ltd 84 ATC 4580; 15 ATR 879. No change is necessary to that practice, which should be applied in cases of this nature. COMMISSIONER OF TAXATION 2 July 1987




2. The taxpayer, a self-employed medical practitioner, required the use of a motor vehicle in the course of carrying on his practice. He obtained a Mercedes motor vehicle on lease on 11 April 1980 for a period of two years. Before the expiration of the lease there was a prospect of the taxpayer having to expend large sums on reconditioning the vehicle. | 3. To be rid of his ongoing obligations under the lease and to avoid prospective outgoings in maintaining the vehicle, the taxpayer on 2 February 1981 purchased the vehicle from the lessor on payment of $12,633.62 and sold it to an arm's length purchaser for $9,550. The balance of $3,083.62, the lease shortfall payment, was paid from the taxpayer's own funds. | 4. In his return of income for the year ended 30 June 1981, the taxpayer claimed a deduction in respect of the lease shortfall payment on the disposal of the motor vehicle. As the vehicle was used for business purposes 90% of the time, a deduction of $2,775 was claimed. | 5. On the disallowance of his claim the taxpayer objected to his assessment, asserting that the lease shortfall payment was a loss on the sale of a motor vehicle deductible under sub-section 52(1) or deductible as a depreciation balancing adjustment under sub-section 59(1) of the Act. At the hearing before the Tribunal, the taxpayer was permitted to extend the grounds of his objection under paragraph 190(a) of the Act to include a ground that the lease shortfall payment was deductible under sub-section 51(1) of the Act. The original objection grounds were abandoned at the hearing. | 6. The Tribunal found that the lease shortfall payment was paid to secure a release from obligations under the lease, a lease which had come to involve the taxpayer in unacceptable costs and which was perceived as likely to involve far greater expense in the future. As the lease shortfall payment was incurred in the ongoing operations of the taxpayer's medical practice, and was expended to be rid of the onerous rental obligation due to the lessor, the Tribunal found that the expense was incurred as a normal incident of carrying on of business by the taxpayer. It was not expenditure of a capital nature. The Tribunal applied the High Court decision in W. Nevill & Co. Ltd v F.C. of T. (1937) 56 CLR 290 to the facts of this case. The 90% proportion of the expense claimed by the taxpayer was held to be an allowable deduction under sub-section 51(1). | Date of effect: Immediate | Date original memo issued: 14.4.87


Related rulings: IT 28, IT 2287
Legislative references: 51(1) 52(1) 59(1)
Case references: Case U47 87 ATC 326
Subject references: LEASE SHORTFALL PAYMENT