ATO ID 2003/515: Capital allowances: motor vehicle accessories - second element of cost
Date of decision: 19 May 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Does capital expenditure incurred by a taxpayer in acquiring and attaching a towbar and a specially designed roof rack to a motor vehicle, form part of the second element of cost under subsection 40-190(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. Capital expenditure incurred in acquiring and attaching a towbar and a specially designed roof rack to a vehicle does form part of the motor vehicle's second element of cost under subsection 40-190(2) of the ITAA 1997.

Facts
A taxpayer incurred expenditure to acquire and attach a towbar and a specially designed roof rack to a motor vehicle they hold, to enable it to be used more efficiently in transporting heavy and bulky parts and equipment to work sites as required in the course of the taxpayer's business. These improvements were done subsequent to the vehicle being held. The towbar and roof racks are bolted to the motor vehicle and the taxpayer has no intention of removing them. The taxpayer bought the items with the express purpose of permanently attaching them to that particular vehicle and as the vehicle is imported, the specifications of the items would prohibit the use of the items on other vehicles. If the vehicle was to be disposed of, the towbar and roof racks would not be removed or sold separately. The ability of the vehicle to perform its required function of transporting parts and equipment to work sites would be severely limited if the items were to be removed as they are an integral part of the vehicle's hauling capacity.

Reasons for decision
Summary: The cost of a depreciating asset consists of both the first and second elements (section 40-175 of the ITAA 1997). The first element of cost is worked out at the time you begin to hold the asset. Generally the first element of cost is the amount paid, or taken to have been paid, to hold the asset (sections 40-180 and 40-185 of the ITAA 1997). The second element of cost is worked out after the taxpayer has begun to hold the asset. This element includes capital expenditure incurred in bringing the asset to its present condition and location (section 40-190 of the ITAA 1997). The capital expenditure incurred by the taxpayer in the acquisition and attaching of the towbar and roof rack to the motor vehicle forms part of the second element of cost under subsection 40-190(2) of the ITAA 1997, as it brings the vehicle to its present condition. These additions enhance the vehicle's capacity to transport equipment and parts that are used in the taxpayer's business.

Legislative references: Income Tax Assessment Act 1997 section 40-175 section 40-190 subsection 40-190(2)
Related ATO interpretative decisions: ATO ID 2003/514 | ATO ID 2003/516
Other references: NAT 1996-6.2002
Subject references: Cost of a depreciating asset Second element of cost Uniform capital allowances system