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  • Car acquired at a discount



    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    If a car is acquired at a discount, the first element of its cost may be increased by the discount portion. The discount portion is any part of the discount that is due to the sale of another asset for less than market value - for example, a trade-in.

    A car's cost is not affected by a discount obtained for other reasons.

    The adjustment is only made if the cost of the car (after GST credits or adjustments) plus the discount portion exceeds the car limit and if you or another entity has deducted or can deduct an amount for the other asset for any income year.

    This rule does not apply to some cars fitted out for transporting disabled people.

    When a balancing adjustment event occurs in relation to the car, the termination value must be increased by the same discount portion - see Balancing adjustment rules for cars.

    Example: Car acquired at a discount - ignoring any GST impact

    Kristine arranges to buy a $60,000 sedan for business use from Greg, a car dealer. She offers the station wagon she is using for this purpose, worth $20,000, as a trade-in. Greg agrees to reduce the price of the sedan to below the car limit if Kristine accepts less than market value for the trade-in. Kristine agrees to accept $15,000 for the trade-in and the price of the sedan is reduced to $55,000 (that is, a discount of $5,000).

    The cost of the car plus the discount is more than the car limit so the first element of the car's cost is increased by the amount of the discount to $60,000. As the first element of cost then exceeds the car limit, it must be reduced to the car limit for the income year. The termination value of the wagon would be taken to be the market value of $20,000 as Kristine and Greg were not dealing at arm's length - see Termination value.

    Non-arm's length and private or domestic arrangements

    The first element of a depreciating asset's cost is the market value of the asset at the time you start to hold it if:

    • the first element of the asset's cost would otherwise exceed its market value and you do not deal at arm's length with another party to the transaction, or
    • you started to hold the asset under a private or domestic arrangement (for example, as a gift from a family member).

    Similar rules apply to the second element of a depreciating asset's cost. For example, if something is done to improve your depreciating asset under a private or domestic arrangement, the second element of the asset's cost is the market value of the improvement when it is made.

    The market value may need to be reduced for any input tax credits to which you would have been entitled - see GST input tax credits.

    Note that there are special rules for working out the effective life and decline in value of a depreciating asset acquired from an associate, such as a spouse or partner - see Depreciating asset acquired from an associate.

    Last modified: 08 Apr 2020QC 27597