ATO ID 2002/933: Termination value of a car - car limit & GST
Date of decision: 18 September 2002
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
If the balancing adjustment event for a car to which the car limit under section 40-230 of the Income Tax Assessment Act 1997 (ITAA 1997) applied is a taxable supply, is the adjustment, under section 40-325 of the ITAA 1997, made after the termination value is first reduced by the amount of the GST payable on the supply?

Decision
Yes. If the balancing adjustment event for a car to which the car limit under section 40-230 of the ITAA 1997 applied is a taxable supply, the adjustment under section 40-325 of the ITAA 1997 is made after the termination value is first reduced by the amount of the GST payable on the supply under subsection 27-95(1) of the ITAA 1997.

Facts
A taxpayer registered for GST acquired a car on 1 July 2001. The cost of the car was $79,500. The car was used solely for a creditable purpose and the maximum input tax credit of $5,012 was claimed. The car limit applied to reduce the first element of cost of the car to the amount of $55,134. The car was later sold for $38,000 including GST.

Reasons for decision
Summary: Generally the termination value of a depreciating asset is the amount you receive for the asset on its disposal. The termination value of a depreciating asset is reduced under subsection 27-95(1) of the ITAA 1997 if the balancing adjustment event is a taxable supply. The reduction is the amount of the GST payable on the supply. The termination value of a car to which the car limit applied is further adjusted by section 40-325 of the ITAA 1997. This section applies a fraction to the termination value worked out after the reduction by subsection 27-95(1) of the ITAA 1997. The fraction is: Car limit + Amounts included in the second element of the car's cost / Total cost of the car (ignoring the car limit) This adjustment recognises that the car limit has reduced the cost of the car otherwise available to work out the decline in value and reduces the car's termination value to an amount proportional to the amount used to work out the car's decline in value. In working out the fraction used to adjust the termination value, the total cost of the car (ignoring the car limit) is the cost after applying Subdivision 27-B of the ITAA 1997. As the cost of a car is reduced by the amount of input tax credit to which an entity is entitled before the car limit applies, this amount is also excluded from the total cost of the car when working out the fraction under section 40-325 of the ITAA 1997. The taxpayer is registered for GST and purchased a car for $79,500 on 1 July 2001. The car was used solely for a creditable purpose. The first element of cost ($79,500) is reduced by the maximum input tax credit ($5,012) to $74,488. The first element of cost is further reduced to the car limit of $55,134. The car was sold on 30 June 2002 for $38,000 including GST. No amounts were included in the second element of the car's cost. The car's termination value is worked out as follows: Reduction for GST under subsection 27-95(1) of the ITAA 1997 Reduction under section 40-325 of the ITAA 1997 The car's termination value is $25,569.

Legislative references: Income Tax Assessment Act 1997 subsection 27-95(1) section 40-230 section 40-325
Related public rulings and determinations: TD 2006/40
Subject references: Goods and services tax Termination value Car limit