ATO Interpretative Decision

ATO ID 2004/11

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can a rally car be counted for the other assets test in section 35-45 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. Paragraph 35-45(4)(b) of the ITAA 1997 excludes cars, motor cycles and similar vehicles from being counted for the other assets test. A rally car conforms to the definition of 'cars' or 'similar vehicles', and is excluded from being counted toward the test because of the exclusion in paragraph 35-45(4)(b) of the ITAA 1997.

Facts

An individual taxpayer carried on a business activity of building rally cars for sale during the 2003 income year.

The vehicles are individually built to suit customer requirements or constructed and held in stock. The vehicle is based on a sedan passenger car platform. In the car's standard passenger sedan form, the vehicle satisfies the definition of 'car'.

To build a rally car, a passenger car is modified by having the rear seat removed, which means that the vehicle can only accommodate two passengers including the driver. The vehicle's passenger protection is also enhanced (roll cage etc) and engine modifications are carried out to improve the vehicle's performance. These rally vehicles are generally only driven on public roads that are closed to the public.

The taxpayer had one of these rally cars in stock at the end of the 2003 income year.

Reasons for Decision

The 'other assets test' in section 35-45 of the ITAA 1997, states that the loss deferral rule in section 35-10 of the ITAA 1997 does not apply to defer a loss from a business activity, for a year where the value of certain assets used on a continuing basis in the business activity, have a collective value of at least $100,000. The table in subsection 35-45(2) of the ITAA 1997 sets out the assets that can be counted for the test and their values. The assets counted are:

1.

An asset whose decline in value you can deduct under Division 40;

2.

An item of trading stock;

3.

An asset that you lease from another entity;

4.

Trademarks, patents copyrights and similar rights.

Assets specifically excluded from being counted for this test, are assets or interests in real property that are taken into account for that year under the 'real property test' (section 35-40 of the ITAA 1997) and cars motor cycles and similar vehicles (subsection 35-45(4) of the ITAA 1997).

Whether a vehicle satisfies the definition of 'cars, motor cycles and similar vehicles' and is excluded, depends on the nature of the vehicle. That is, whether the vehicle in question satisfies the relevant definitions, or ordinary meanings of the relevant terms, as the case requires.

The critical issue in this case is whether rally cars are '*cars, motor cycles and similar vehicles' for the purposes of paragraph 35-45(4)(b) of the ITAA 1997. The asterisk indicates that the term 'cars' is defined in section 995-1 of the ITAA 1997. A 'car' is a motor vehicle designed to carry a load of less than one tonne and fewer than nine passengers. It does not include motor cycles or similar vehicles.

The term 'motor vehicle' is then defined in section 995-1 of the ITAA 1997 to mean 'any motor-powered road vehicle', including a four-wheel drive vehicle.

Therefore, to determine if a rally car comes within the definition of 'cars' it must be determined whether the rally car:

•

is designed to carry a load of less than one tonne;

•

is designed to carry less than nine passengers; and

•

is a motor vehicle;

•

or is a vehicle similar to 'cars'.

When a vehicle is modified, the modifications will need to be significant, not easily reversed and fundamentally change the vehicle to remove it from the classification of 'cars, motor cycles and similar vehicles' for the purposes of section 35-45 of the ITAA 1997.

Where a vehicle, that is a derivative of a car, has undergone significant modifications, it may be necessary to assess on a case by case basis, whether the vehicle is a 'similar vehicle' for the purpose of paragraph 35-45(4)(b) of the ITAA 1997. Each case would need to be determined on its individual facts, as not all modifications will affect the nature of the vehicle (Miscellaneous Taxation Ruling MT 2033).

A car modified for rallying will remain a car or similar vehicle. This is because the modifications for the purpose of Division 35 will need to extend beyond changing the function of the vehicle, to altering the fundamental design of the vehicle.

In conclusion, even though the taxpayer's rally car is not used on public roads and there have been some modifications to the vehicle, the nature or fundamental design of the vehicle has not changed. The rally car is:

•

designed to carry a load of less than one tonne;

•

designed to carry less than nine passengers; and

•

is a motor vehicle; or is a vehicle similar to 'cars'.

The taxpayer's rally car satisfies the definition of 'cars, motor cycles and similar vehicles' in paragraph 35-45(4) of the ITAA 1997 and as a result, is an asset that cannot be counted for the other assets test.

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 995-1
   Division 35
   section 35-10
   section 35-40
   section 35-45
   subsection 35-45(2)
   paragraph 35-45(4)(b)

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/14
Taxation Ruling TR 2001/14A - Addendum
Miscellaneous Tax Ruling MT 2033

Keywords
NCL deferred losses
NCL offset against other income
NCL other assets test
Non commercial losses

Business Line:  Small Business/Individual Taxpayers

Date of publication:  16 January 2004

ISSN: 1445-2782