ATO ID 2004/393: Deductions: motor vehicle expenses - insurance policy excess
Date of decision: 5 April 2004
Year of income: 30 June 2004
Business line: Small Business/Individual Taxpayers

Issue
Is the taxpayer, a delivery driver, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for the payment of the excess under their employer's motor vehicle insurance policy?

Decision
Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the payment of the excess under their employer's motor vehicle insurance policy.

Facts
The taxpayer was employed as a delivery driver. The taxpayer used their own motor vehicle to carry out their employment duties. The taxpayer's use of their motor vehicle for work related purposes was covered under their employer's business vehicle insurance policy. The taxpayer retained their own private motor vehicle insurance to cover them for their private use of their motor vehicle. The taxpayer's employment agreement provides that they are liable to pay any insurance excess that arises out of any claim against their employer's insurance provider, for any motor vehicle accident that occurs whilst driving their motor vehicle for work related purposes. The taxpayer was involved in a motor vehicle accident, whilst driving their motor vehicle in the course of their employment, for which they were found to be at fault. As a result of this accident, a claim was made against the employer's insurance provider and an excess was payable. The taxpayer paid the excess in relation to this claim.

Reasons for decision
Summary: Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. In Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15; (1949) 4 AITR 236; (1949) 8 ATD 431, the Court established that, for a loss or outgoing to be an allowable deduction, there must be a nexus between the outgoing and the assessable income so that the expenditure is incidental and relevant to the taxpayer's income-producing or business operations. Case T22 86 ATC 223; Case 25 (1986) 29 CTBR (NS) 173 (Case T22) recognised that liabilities arising out of motor vehicle accidents may be incidental and relevant to the taxpayer's income earning activities. That case dealt with the deductibility of liabilities arising out of a motor vehicle accident for which the taxpayer admitted fault. The Board of Review found that an accident and any ensuing liability is a normal risk of using public roads for business purposes. In finding that the taxpayer was entitled to a deduction for the liabilities he incurred as a result of the accident damage, the Board stated that amongst other things: ...in the circumstances of the accident, the vehicle driven by him was the immediate cause of damage to the other vehicles which, in turn gave rise to the expense in issue. In the circumstances, we are of the opinion that the expenses are incidental and relevant to gaining or producing the taxpayer's assessable income... It is considered that the principles espoused in Case T22 are equally relevant to the circumstances here. This taxpayer was involved in a motor vehicle accident whilst driving their motor vehicle on public roads in the course of their employment. The taxpayer's employment agreement provided that they were liable to pay any insurance excess that arose out of a claim made in relation to any motor vehicle accident that occurred whilst driving their motor vehicle for work related purposes. The insurance excess was only payable in respect of a claim arising out of the work related use of the taxpayer's motor vehicle. The excess was payable by the taxpayer regardless of whether any other party was involved in the work related motor vehicle accident, and whether or not any damage was sustained by the taxpayer's own motor vehicle. The expense in paying the insurance excess, which could arise only in relation to work related motor vehicle accidents, was incurred as a result of the taxpayer's conditions of employment. As such the expense was incidental and relevant to the gaining or producing of the taxpayer's assessable income. Therefore, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for the payment of the insurance excess.

Legislative references: Income Tax Assessment Act 1997 section 8-1
Case references: Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47 [1949] HCA 15 (1949) 4 AITR 236 (1949) 8 ATD 431
Subject references: Deductions & expenses Insurance Insurance excess under an insurance policy Motor vehicle insurance Motor vehicles