Private ruling: Depreciation of a luxury car
Date of advice: 24 July 2018
Published: September 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Can a car be classified as a piece of equipment or machinery for the purposes of depreciation under Income Tax Assessment Act 1997 Division 40? | A1: No.

Relevant facts and circumstances: You purchased a luxury car designed to carry passengers in your own name. This car will be hired out to organisations who then rent it to high income earners for short periods of time.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Section 45-40 | Income Tax Assessment Act 1997 Section 995-1 | Acts Interpretation Act 1901 Section 15AA | Acts Interpretation Act 1901 Section 15AB

Reasons for decision: Summary: 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 decline in value of a depreciating asset is calculated on the basis of the effective life of the asset. The Commissioner produces an annual determination of the effective life of a range of assets in accordance with subsection 40-100(1) of the ITAA 1997. The most recent such determination is Taxation Ruling TR 2018/4 - Income tax: effective life of depreciating assets (applicable from 1 July 2018) . A car is specifically listed in TR 2018/4 and is defined in subsection 995-1(1) of the ITAA 1997 to mean '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.' As such the Commissioner’s effective life of eight years for motor vehicles/car would apply to you. The cost of a depreciating asset has two elements. The first element of the cost is worked out under Subdivision 40-C of the ITAA 1997 as at the time you start to hold the asset and includes amounts you have taken to have paid to hold the asset, such as the acquisition price. The first element of the cost of certain cars is subject to a limit. 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 taxpayer started to hold it if its cost exceeds that limit. The car limit for the 2017-18 income year is $XX,XXX. This is the amount you must use for your depreciation calculations. | Detailed Reasoning - Is your car a ‘machine’?: The Acts Interpretation Act 1901 (AIA) is comparable to a dictionary or manual to use when reading and interpreting Commonwealth Acts and instruments made under Commonwealth Acts. It contains provisions which apply to the interpretation of Commonwealth statutes. Two of the most important provisions are section 15AA and 15AB: ● Section 15AA of the AIA effectively requires the Commissioner to take a purposive approach to interpretation: that is, to interpret the tax law in a way that promotes Parliament’s purpose or object underlying the legislative provisions. A purposive interpretation is to be preferred even if a more literal interpretation is possible. ● Section 15AB permits the use of material that is not part of an Act, such as explanatory memoranda and second reading speeches, in interpreting an Act. Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out a number of definitions of words and expressions which are used in the Act. The section is designed to provide a central point where you can either find definitions or be directed to other sections in the Act where those definitions can be found. 995-1 defines the following terms: plant has the meaning given by section 45-40. car means 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. motor vehicle means any motor-powered road vehicle (including a 4 wheel drive vehicle). Section 45-40: Plant includes: (a) articles, machinery, tools and rolling stock; and (b) animals used as beasts of burden or working beasts in a * business, other than a * primary production business; and (c) fences, dams and other structural improvements, other than those used for domestic or residential purposes, on land that is used for agricultural or pastoral operations; and (d) structural improvements, other than a * forestry road or structural improvements used for domestic or residential purposes, on land used in a business involving: (i) planting or tending trees in a plantation or forest that are intended to be felled; or (ii) felling trees in a plantation or forest; or (iii) transporting trees, or parts of trees, that you felled in a plantation or forest to the place where they are first to be milled or processed, or from which they are to be transported to the place where they are first to be milled or processed; and (e) structural improvements, other than those used for domestic or residential purposes, that are used wholly for operations (carried out in the course of a business) relating directly to: (i) taking or culturing pearls or pearl shell; or (ii) taking or catching trochus, b ê che-de-mer or green snails; and that are situated at or near a port or harbour from which the business is conducted; and (f) structural improvements that are excluded from paragraph (c), (d) or (e) because they are used for domestic or residential purposes if they are provided for the accommodation of employees, tenants or sharefarmers who are engaged in or in connection with the activities referred to in that paragraph. | Detailed Reasoning - ‘Machinery’: As outlined above, section 45-40 defines the meaning of ‘plant’ and includes ‘machinery’ in that definition. Machines are depreciating assets as they have a limited life and can be reasonably expected to decline in value over the time they are used. In Carpentaria Transport Pty Ltd v FCT (1990) 21 ATR 513, the Federal Court held that machinery is depreciable whether or not it forms an integral part of a building or is part of the setting in which the business is carried on. ‘Machinery’ was held to have a meaning and effect additional to that of the word ‘plant’. In Taxation Ruling TR 2004/16 Income tax: plant in residential rental properties, the ATO considers that the ordinary meaning of ‘machinery’ includes devices such as computers and microprocessors, as well as stoves, cooktops, ovens and hot water services. However, according to that ruling, the ordinary meaning of ‘machinery’ does not include anything that is merely a reservoir or conduit, such as ducting, piping or wiring, although connected with something that is machinery. In other words, if the ducting, piping or wiring forms part of a unit that is a machine then it is machinery, but if it is merely connected to, but not part of, a unit that is a machine then it is not machinery. | Detailed Reasoning - Conclusion: ‘Plant’ and ‘cars’ have been specifically defined in the legislation and these definitions cannot be disregarded. Looking at the factors in Taxation Determination TD 94/19 you have a car which is designed mainly for carrying passengers and therefore the cost is capped to the car limit for the financial year in which you started to hold it. The law is clear on claiming depreciation for plant or for a car. The Commissioner has no discretion to allow a car to be depreciated as a piece of machinery.