Private ruling: Capital Allowance (depreciation deductions) and GST on purchase of a car
Published: September 2016
Ruling period: 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018
Date scheme commenced: 1 July 2015

Ruling: Q1: Is X Family Trust entitled to claim depreciation deductions or capital allowance on the cost of a particular vehicle (the vehicle) beyond the car limit provided under section 40-230 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No Issue 2 | Q2: Is X Family Trust entitled to full input tax credits (ITC) on its acquisition of a particular vehicle (the vehicle)? | A2: No

Relevant facts and circumstances: X Family Trust operates a business. X Family Trust is registered for Goods and Services Tax (GST). X Family Trust purchased a particular vehicle (the vehicle) from a registered motor vehicle dealer and took delivery of the vehicle in the financial year ended 30 June 2016. The vehicle was supplied wholly within Australia when it was supplied to X Family Trust by the motor vehicle dealer. The vehicle has 4 wheel drive. X Family Trust has a tax invoice from the motor vehicle dealer which shows: • Total Purchase Amount over $90,000.00 • GST • LCT - Luxury Car Tax • X Family Trust did not provide their ABN to the motor vehicle dealer • a discount was given • there was no trade-in • Body Type: wagon • Category (of sale): Retail Passenger and load carrying capacity provided by the vehicle Specifications: • seating capacity of seven • load carrying capacity of less than one tonne. The vehicle will be used 100% for business purposes. The vehicle meets the business's requirements to be able to transport a team of workers and has the towing power needed to tow heavy equipment the business uses to the areas they need to access for work. The vehicle will not be held as trading stock, nor be used for the purpose of research and development for the manufacturers of the motor vehicle and will not be exported by X Family Trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 s ection 40-25 | Income Tax Assessment Act 1997 subsection 40-25(2) | Income Tax Assessment Act 1997 section 40-175 | Income Tax Assessment Act 1997 section 40-180 | Income Tax Assessment Act 1997 section 40-225 | Income Tax Assessment Act 1997 paragraph 40-230(1)(b) | Income Tax Assessment Act 1997 subsection 995-1(1) | A New Tax System (Goods and Services Tax) Act 1999 subsection 69-10(1) | A New Tax System (Luxury Car Tax) Act 1999 subsection 9-5(1)

Reasons for decision: Summary: X Family Trust is not entitled to claim capital allowance or depreciation deductions on the cost of the vehicle beyond the car limit provided under section 40-230 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for the decline in value of a depreciating asset to the extent that it is used for the purpose of producing assessable income. The vehicle is a depreciating asset that is used 100% for business purposes therefore X Family Trust can claim deductions for its decline in value. Section 40-175 of the ITAA 1997 provides that the cost of a depreciating asset an entity holds consists of two elements: • the first element is worked out at the time the entity began to hold the depreciating asset and is generally the amount paid for it (section 40-180 of the ITAA 1997) • the second element generally consists of amounts an entity has paid since they started to hold the depreciating asset that have contributed to bringing the asset to its present condition and location (section 40-190 of the ITAA 1997). First element of the cost of a car Subsection 40-230(1) of the ITAA 1997 provides that the first element of the cost of a car designed mainly for carrying passengers is reduced to the car limit for the financial year in which the entity started to hold it, if its cost exceeds the car limit. The car limit applies after any applicable discount (generally from a trade-in) has been added back onto the cost and after the cost has been reduced by GST input tax credits (section 40-225 and section 27-80 of the ITAA 1997). The car limit for the 2015-16 financial year is $57,466. Section 995-1of the ITAA 1997 defines 'car' as a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers, and defines 'motor vehicle' as any motor-powered road vehicle (including a 4 wheel drive vehicle). The vehicle meets this definition of a car as it is designed to carry a load of less than one tonne and carry fewer than nine passengers. Designed mainly for carrying passengers As mentioned above, the first element of the cost of a car designed mainly for carrying passengers is reduced to the car limit if its cost exceeds the car limit. Taxation Determination TD 94/19 states that in determining the principle purpose for which a vehicle (other than a dual cab or crew cab) is designed, regard should be had to factors including, but not limited to: • the appearance and presentation of the vehicle • any relevant promotional literature • the emphasis evident in marketing • the vehicle's specifications • load carrying capacity • passenger carrying capacity In determining the principle purpose for which the vehicle is designed, we had regard to the following factors: • the vehicle is the top of the range model • the vehicle is a 4 wheel drive station wagon with the appearance and presentation of a passenger vehicle • interior configuration supports that the vehicle is not primarily designed for carrying goods: • seating capacity of seven • limited cargo area • emphasis is on passenger comfort • the vehicle has the latest technological innovations and luxury features • towing capacity is 3,500kg (with a braked trailer) • the Specifications show that the vehicle fits into the Australian Design Rule 'Off-road passenger vehicle category' as it has four wheel drive plus other specified characteristics • the Specifications appear to market the vehicle to buyers looking for a large, comfortable, safe, family wagon; designed for long distance journeys and remote area touring; not those looking for a commercial vehicle • a number of features the vehicle provides for passenger comfort and safety are available in many modern passenger vehicles (relative to their make/price range) • the tax invoice shows LCT was paid on the vehicle: • section 27-1 of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) defines 'car' as a motor vehicle (except a motor cycle or similar vehicle) that is designed to carry a load of less than 2 tonnes and fewer than 9 passengers and defines motor vehicle as a motor-powered road vehicle (including a 4 wheel drive vehicle). Section 25-1 of the LCT Act provides that a car is not a luxury car if it is a commercial vehicle that is not designed for the principal purpose of carrying passengers • the fact that LCT was paid shows that the motor vehicle dealer categorised the vehicle as a car. The above factors lead to a conclusion that the vehicle is not designed for the principle purpose of carrying goods for business or trade but is a car that is designed mainly for carrying passengers. The vehicle has the power to tow heavy equipment the business uses however towing capacity doesn't change the inherent design as a passenger vehicle. The inherent design determines whether or not the car limit applies, not the use of the vehicle. | Detailed Reasoning - Applying the car cost limit: Before applying the car cost limit, the cost of the car must be: (a) increased by the discount on a trade-in (where applicable); and (b) reduced by the amount of any input tax credit the entity is entitled to. In relation to the vehicle: (a) X Family Trust did not trade-in another vehicle on the purchased vehicle so the cost does not have to be increased by the discount shown on the tax invoice (b) the cost of the vehicle must be reduced by the input tax credit that X Family Trust is entitled to. The reduced cost is then further reduced to the car limit of $57,466. | Detailed Reasoning - Exceptions: Subsection 40-230(2) of the ITAA 1997 provides that the car limit does not apply to a car: • fitted out for transporting disabled people in wheelchairs for profit (for example specially modified taxis); or • whose first element of cost exceeds the car limit only because of modifications made to enable an individual with a disability to use the car for a taxable purpose. The vehicle does not fit into these exception categories. The Commissioner has no discretion regarding the application of the car limit. | Detailed Reasoning - Conclusion: The car limit does apply for the purpose of working out the deductions for the vehicle's decline in value. X Family Trust is not entitled to claim depreciation deductions or capital allowance on the vehicle beyond the car limit provided under section 40-230 ITAA 1997. Accordingly, the first element of the cost of the vehicle is $57,466 being the car limit for the 2015-16 financial year. | Summary: X Family Trust is not entitled to full ITC on its acquisition of the vehicle. X Family Trust is only entitled to claim 1/11 of the car limit as ITC. | Detailed Reasoning - Detailed reasoning: Subsection 69-10(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that if an entity makes a creditable acquisition of a car, and the entity is not entitled to quote an ABN for luxury car tax purposes, in relation to the acquisition of the vehicle, and the GST inclusive market value of that car exceeds the car limit, the amount of input tax credit on that acquisition is limited to a maximum of 1/11th of that limit. The car limit was $57,466 for the 2015-16 financial year. | Detailed Reasoning - Quotable purpose: Subsection 9-5(1) of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act) provides that you are entitled to quote your ABN in relation to the supply or importation of a luxury car if you have the intention of using the car for one of the following purposes and for no other purpose: (a) holding the car as trading stock, other than holding it for hire or lease; or (b) research and development for the manufacturer of the car; or (c) exporting the car in circumstances where the export is GST-free. In this case, as X Family Trust will not be holding the car for any of the purposes described above, it will not be entitled to quote. Therefore, subsection 69-10(1) of the GST Act will apply to limit the ITC that X Family Trust can claim to 1/11 of the car limit.