Private ruling: Taxation implications on disposal of motor vehicles
Date of advice: 29 June 2015
Published: June 2015
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will any gain made on the disposal of the cars, being depreciating assets, be assessed as ordinary income? | A1: Yes | Q2: Do the cars meet the definition of active assets? | A2: Yes | Q3: Will any gain made on the disposal of the cars be assessed under the capital gains tax provisions? | A3: No | Q4: Do you satisfy the necessary conditions to be able to access the capital gains tax concessions for small business? | A4: No

Relevant facts and circumstances: You are a partnership that carries on a business of hiring cars for transports. The cars are owned by the individual partners, but are used in the partnership business. You have disposed of the cars when the business was wound up. You provide that the vehicles were maintained at the highest commercial standards so that they could continue to generate revenue. You consider that as the upkeep of the cars were required to be at the highest levels of presentation, their market value at the time of sale would ultimately be higher than their deemed depreciation value from day 1 of service. The cars are not taxis, nor merely cars, but are utilised as small charter vehicles.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Section 40-30 | Income Tax Assessment Act 1997 Section 40-70 | Income Tax Assessment Act 1997 Section 40-75 | Income Tax Assessment Act 1997 Section 40-95 | Income Tax Assessment Act 1997 Section 40-100 | Income Tax Assessment Act 1997 Section 40-105 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 118-5 | Income Tax Assessment Act 1997 Section 152-10 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 152-35

Reasons for decision: Detailed Reasoning - Disposal of depreciating assets: Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) contains the capital allowance provisions which allow deductions for the decline in value of depreciating assets. A depreciating asset is defined in section 40-30 of the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, but does not include intangible assets, land, or items of trading stock. Generally, the decline in value of such asset is calculated by spreading the cost of the asset over the effective life of the asset, either using the diminishing value method (section 40-70 of the ITAA 1997) or the prime cost method (section 40-75). Under section 40-95, the taxpayer has the choice of: (i) using the effective life determined by the Commissioner for the depreciating asset under section 40-100, or (ii) self-assessing the effective life of the asset under section 40-105. If the Commissioner has not specified the effective life for an asset, then the taxpayer must determine the effective life under section 40-105. The effective life is the period that the asset can be used by the taxpayer or anybody else for income-producing purposes (whether taxable purposes or exempt income-producing purposes), assuming it will be subject to wear and tear at a reasonable rate and that it will be maintained in reasonably good order and condition. The Explanatory Memorandum to Act No 76 of 2001 at paragraphs 1.13 and 1.14 states that: A depreciating asset is broadly defined in subsection 40-30(1) as being an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used… This does not limit depreciating assets to things that lose value steadily over their effective life. Nor are depreciating assets limited to things that only ever decline in value. Depreciating assets may hold their value for a time or even increase it for a time. The test of a depreciating asset requires only that the asset lose its value overall (or down to no more than scrap value) by the end of its effective life. From that effective life, the statutory methods produce a statutory decline from time to time, which is not required to be correlated to an expected decline in market value with the same timing. The balancing adjustment rules bring the adjustable value, that is the cost as declined by statute from time to time, back into line with value when a balancing adjustment event occurs, essentially when a taxpayer stops holding the asset. Division 40 of the ITAA 1997 also applies to certain assets such as artworks which are not expected to decline in value over the time they are used. Although the explanatory memorandum envisaged that depreciating assets could hold or even increase in value in the short term, their essential feature is that they would lose value overall. The very long effective life of artworks (determined by the Commissioner under section 40-100 as being 100 years) partly recognises this difficulty. However, they are still considered depreciating assets. In your case, while it is acknowledged that the cars would hold their value for longer than a standard motor vehicle, the fact remains that eventually the cars will no longer be able to be used no matter how well preserved. Therefore, the cars you have disposed of are depreciating assets and any gain you make on the disposal of them is treated as ordinary income and any loss as a deduction. It is only when a depreciating asset has been used for a non-taxable purpose (for example, used privately) that you can make a capital gain or capital loss on it. | Detailed Reasoning - Are the cars active assets?: Section 108-5 of the ITAA 1997 explains that a CGT asset is; a) any kind of property; or b) a legal or equitable right that is not property Section 152-40 of the ITAA 1997 provides the meaning of 'active asset'. A CGT asset will be an active asset at a time if, at that time, you own the asset and the asset was used or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, an affiliate of yours, or by another entity that is 'connected with' you. In your case, you are a partner in a partnership that carries on a business. The cars you own have been used by the partnership in the course of carrying on a business. The cars you own are CGT assets. Accordingly, the cars will be active assets. | Detailed Reasoning - Cars and capital gains tax: Section 995-1 of the ITAA 1997 explains that a car is a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers. Section 118-5 of the ITAA 1997 states that you disregard a capital gain or capital loss you make on a car, motor cycle or similar vehicle. Accordingly, the cars you have disposed of are not assessed under the capital gains tax provisions. | Detailed Reasoning - Small business capital gains tax (CGT) concession eligibility: Section 152-10 of the ITAA 1997 explains that a capital gain (except a capital gain from CGT event K7) you make may be reduced or disregarded under Division 152 (about small business CGT concessions) if you satisfy the following basic conditions: (a) a CGT event happens in relation to a CGT asset in an income year. (b) the event would (apart from this Division) have resulted in a gain (c) at least one of the following applies: (i) you are a small business entity for the income year (ii) you satisfy the maximum net asset value test in section 152-15 of the ITAA 1997 (iii) you are a partner in a partnership that is a small business entity for the income year and the CGT asset is an asset of the partnership or (iv) the conditions in subsection 152-10(1A) or (1B) of the ITAA 1997 are satisfied in relation to the CGT asset in the income year. (d) the CGT asset satisfies the active asset test in section 152-35 of the ITAA 1997. Section 104-10 of the ITAA 1997 provides that CGT event A1 happens when your ownership in a CGT asset is transferred to another entity. Section 118-5 of the ITAA 1997 states that you disregard a capital gain or capital loss you make on a car, motor cycle or similar vehicle. In your case, you have disposed of the cars, so CGT event A1 has happened. However, the event has not (apart from Division 152) resulted in a gain. This is because any capital gain made on the disposal of the cars is disregarded under section 118-5 of the ITAA 1997 and there will be no capital gain remaining to which the Division 152 concessions can apply.