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) on the early termination of the lease in the circumstances of section 42A-100 of Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
No. Even though the lessee changes from being a holder of the car under item 1 of the table in section 40-40 of the ITAA 1997 to being a holder of the car under item 10 of that table, a balancing adjustment event under paragraph 40-295(1)(a) of the ITAA 1997 does not occur for the car because the lessee does not stop holding it.
Facts
The taxpayer is the lessee of a luxury car with the effect that Division 42A of Schedule 2E to the ITAA 1936 applies to the arrangement. The taxpayer and the lessor are the only parties to the arrangement which does not involve full or partial novation as described in Taxation Ruling TR 1999/15. The taxpayer terminated the lease before the end of the lease term and, on termination, acquired the car from the lessor. As a result, the provisions of section 42A-100 of Schedule 2E to the ITAA 1936 apply.
Reasons for Decision
Under subsection 42A-15(2) of Schedule 2E to the ITAA 1936, the lessee 'is taken to be the owner of the car until the lease term ends or the lease is terminated before that time, as the case may be.' During that period of 'ownership', the lessee is the holder of the car under item 1 of the table in section 40-40 of the ITAA 1997.
The taxpayer terminated the lease before the end of the lease term and, on termination, acquired the car from the lessor. This means that the 'ownership' period under subsection 42A-15(2) of Schedule 2E to the ITAA 1936 ceased and item 1 of the table in section 40-40 of the ITAA 1997 no longer applied from that time.
On the acquisition of the car, the lessee becomes the holder of it under item 10 of the table in section 40-40 of the ITAA 1997. However, section 42A-100 of Schedule 2E to the ITAA 1936 provides that where an early termination of the lease occurs and, on that termination, 'an amount is paid to the lessor by, or on behalf of, the lessee to acquire the car', the lessee 'is taken to continue to be the owner of the car until the lessee disposes of it' (see paragraph 42A-100(c) of Schedule 2E to the ITAA 1936). The effect of this provision is to provide a continuous holding of the car by the lessee.
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. The change from the taxpayer being a holder as lessee under item 1 of the table in section 40-40 of the ITAA 1997 to being a holder as owner under item 10 of the table in section 40-40 of the ITAA 1997 does not, in this case, cause the taxpayer to stop holding the car at any time because the effect of paragraph 42A-100(c) of Schedule 2E to the ITAA 1936 is to provide a continuous holding of the car by the taxpayer.
Consequently, no balancing adjustment event occurred for the car under paragraph 40-295(1)(a) of the ITAA 1997.