ATO Interpretative Decision

ATO ID 2002/693 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as it is superseded by Taxation Determination TD 2006/40
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997), is the cost of a car reduced by the amount of any input tax credit before the car limit is applied?

Decision

Yes, the first element of cost is reduced under subsection 27-80(1) of the ITAA 1997 by the amount of the input tax credit to which the taxpayer is entitled. Under section 40-230 of the ITAA 1997 the first element of cost is then further reduced to the car limit if it exceeds that limit.

The car limit for the 2001-02 financial year is $55 134. This amount is indexed annually.

Reasons for Decision

Deductions for the decline in value of a car are worked out under Division 40 of the ITAA 1997 using the cost worked out under Subdivision 40-C of the ITAA 1997. The first element of the cost of a car is reduced to the car limit under section 40-230 of the ITAA 1997. This operates to limit the cost that would otherwise be used in working out the decline in value of a car.

The New Business Tax System (Capital Allowances - Transitional and Consequential) Act 2001 inserted Subdivision 27-B into the ITAA 1997. This subdivision sets out the treatment of GST in respect of depreciating assets and other expenditure for which deductions are available under Division 40 of the ITAA 1997.

Under subsection 27-80(1) of the ITAA 1997, the input tax credit to which a taxpayer is entitled does not form part of the first element of cost used to work out the decline in value of a depreciating asset (including a car).

Section 69-10 of the A New Tax System (Goods and Services Tax) Act 1999 limits the input tax credit for a car to 1/11th of the car limit (i.e. 1/11th of $55 134 for the 2001-02 financial year). Therefore the maximum input tax credit available in the 2001-02 financial year is $5012.

In working out the cost of a car under Subdivision 40-C of the ITAA 1997, then, the reduction for any input tax credit and application of the car limit are taken into account as follows:

1.

the first element of the cost of the car is reduced by the amount of any input tax credit to which the taxpayer is entitled (subsection 27-80(1) of the ITAA 1997); and

2.

the first element of cost is further reduced to the car limit to the extent it exceeds that limit (section 40-230 of the ITAA 1997).

Example

A taxpayer is registered for GST and in January 2002 purchases a car for $77 000. The car is used solely for a creditable purpose.

The first element of cost ($77 000) is reduced by the maximum input tax credit ($5012) to $71 988. This exceeds the car limit. The first element of cost is further reduced to the car limit of $55 134.

If the car had been purchased for $57 000, the first element of cost would be reduced to $51 988 (by the maximum input tax credit of $5012) and the car limit would have no application.

Year of income:  Year ended 30 June 2002

Legislative References:
A New Tax System (Goods and Services Tax) Act 1999
   section 69-10

Keywords
Uniform capital allowances system
Cost of a depreciating asset
Cost adjustments
Car limit
Input tax credit entitlement
First element of cost

Business Line:  Centre of Expertise Capital Allowances

Date of publication:  3 July 2002

ISSN: 1445-2782