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) at the end of a novation arrangement between an employee and employer?
Decision
Yes. A balancing adjustment event does occur for the car under paragraph 40-295(1)(a) of the ITAA 1997 because, at the end of the novation arrangement, the employer stops 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.
Reasons for Decision
Former Division 42A of former Schedule 2E to the Income Tax Assessment Act 1936 (ITAA 1936) (repealed on 1 July 2010 and replaced with Division 242 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to the lease of a luxury car.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 employee did not hold the car during the lease period. At the end of the novated lease period, 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 employer stopped holding the car because the novation arrangement that caused them to hold it had ended.
Accordingly, a balancing adjustment event occurred under paragraph 40-295(1)(a) of the ITAA 1997 for the car held by the employer at the time the novation arrangement ended.
Amendment History
Date of Amendment Part Comment 24 May 2019 Reason for Decision Legislation repealed on 1 July 2010. New Legislative reference inserted Legislative references Inserted Division 242 of the ITAA 1997
Date of Amendment | Part | Comment
24 May 2019 | Reason for Decision | Legislation repealed on 1 July 2010. New Legislative reference inserted
Legislative references | Inserted Division 242 of the ITAA 1997