Edited version of private ruling

Authorisation Number: 1011524539012

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Ruling

Subject: Deduction - motor vehicle

1. Are you entitled to a deduction for the cost of purchasing a motor vehicle used in your business activities?

No.

2. Are you entitled to a capital allowance deduction for a motor vehicle used in your business activities?

Yes.

This ruling applies for the following period:

1 July 2007 to 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You purchased a motor vehicle.

It is not registered for road use and is unable to be driven on Australian roads.

You operate a business organising competitions each year.

You transport the motor vehicle to each competition for use in the competition.

The motor vehicle is featured in calendars and promotional posters which you sell as part of your business activities.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 40-25.

Reasons for decision

Summary

A deduction is allowable for the decline in value of the motor vehicle from the time you became the owner of the motor vehicle as it is a depreciating asset used in earning your assessable income.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.

In your case you have purchased a motor vehicle for use in your business activities. You take photographs of the motor vehicle which are used in calendars and promotional posters.

The cost of purchasing an asset is generally of a capital nature and is therefore not immediately deductible as an ordinary business expense. However, section 40-25 of the ITAA 1997 may allow a capital allowance deduction for the decline in value of a depreciating asset used for income producing activities.

A depreciating asset is an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used. A motor vehicle is considered to be a depreciating asset.

A depreciating asset starts to decline in value when you first use it for any purpose, including a private purpose. This is known as the depreciating asset's start time.

Although an asset is treated as declining in value from its start time, a deduction for its decline in value is only allowable to the extent that it is used for an income producing purpose. Thus, if the asset is used partly for non-income producing purposes the total decline in value amount for an income year must be apportioned between income and non-income producing use. Only the income producing use portion can be claimed as a deduction.

Similarly, if the asset is only used for part of the year for income producing purposes, the deduction must also be apportioned on a time basis.

In calculating the deduction, the taxpayer must also determine the effective life of the asset. Generally, the effective life of a depreciating asset is how long it can be used by any entity for a taxable purpose:

· having regard to the wear and tear you reasonably expect from your expected circumstances of use

· assuming that it will be maintained in reasonably good order and condition, and

· having regard to the period within which it is likely to be scrapped, sold for no more than scrap value or abandoned.

For most depreciating assets, a taxpayer has the choice of either working out the effective life themselves or using an effective life determined by the Commissioner. Taxation Ruling TR2007/3 lists the Commissioner's determination of the effective life for various depreciating assets for the 2007-08 income year.

When a depreciating asset is sold, a balancing adjustment (the difference between the sale price and the depreciated value of the asset) is calculated. This amount will be included in the taxpayer's income if the sale price is greater than the depreciated value or will be an additional deduction if the depreciated value is greater than the sale price.

No deduction will be allowed for the cost of purchasing the motor vehicle as it is considered to be a purchase of a capital asset. A decline in value deduction will be allowed from the date you first held the motor vehicle.

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