Edited version of private ruling

Authorisation Number: 1011585972191

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Ruling

Subject: Deductibility of extended motor vehicle warranty

Question

Can you claim a tax deduction for the cost of an extended motor vehicle warranty in the year it was incurred?

Answer: No

This ruling applies for the following period

Year ending 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts

You operate a business.

You purchased a new motor vehicle for business purposes with the factory three-year warranty attached.

The vehicle has a carrying capacity of less than one tonne and you use a log book to determine your business usage.

You also purchased a two-year extended warranty (taking the warranty to five years) for an amount exceeding $1000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1936 subsection 82KZL(1)

Income Tax Assessment Act 1936 section 82KZM

Reasons for decision

Summary

It is considered that the extended warranty is deductible to the extent that the vehicle is used for business. However, the prepayment rules apply to spread the deduction for the prepaid expense over the period during which the extended warranty is provided. In your case, that is years four and five of your ownership period.

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.

The Commissioner's view on extended warranties from the view of the purchaser is that, in contrast to a new car warranty, the purchase of an extended warranty is a separate contract from the contract for the sale of the car and is a form of insurance that is not directly attributable to the acquisition or delivery of the car. As such, these amounts are to be taken to constitute the operating cost of a car.

Standard (factory) warranties apply to every vehicle sold. The acquisition of an extended warranty is a separate and distinct contract and is not part of the consideration for the purchaser to get title to the vehicle. It only attaches to a specific vehicle if a customer chooses to take up the option.

You are entitled to claim a deduction for expenses incurred in operating a business vehicle under section 8-1 of the ITAA 1997 to the extent that it is used for business. Therefore, the cost of an extended warranty is an allowable deduction.

Expenditure is generally deductible in full under section 8-1 of the ITAA 1997 in the year that it is incurred. However, where an agreement provides for a prepayment of fees, that is, expenditure incurred in one year for things to be done (in whole or in part) in a later year of income, such expenditure incurred by a taxpayer may be subject to the timing rules in section 82KZM of the Income Tax Assessment Act 1936 (ITAA 1936).

The effect of section 82KZM of the ITAA 1936 is to evenly spread the deduction for a prepaid expense over the years comprising an 'eligible service period'.

A prepaid motor vehicle expense incurred by a business will not be subject to these timing rules if:

· it is expenditure, less than $1,000; or

· the eligible service period is 12 months or less ('the twelve month rule');

Subsection 82KZL(1) of the ITAA 1936 provides that the 'eligible service period' in relation to an amount of expenditure incurred under an agreement is the period during which the thing is to be done under the agreement in return for the expenditure. The eligible service period begins on the day on which the thing under the agreement commences to be done or on the day on which the expenditure is incurred, whichever is the later, and ends on the last day on which the thing under the agreement ceases to be done, up to a maximum of 10 years (subsection 82KZL(1) of the ITAA 1936).

In your case, you are carrying on a business and prepaying expenditure of over $1,000 for the cost of an extended warranty, for services that will extend over a period greater than 12 months. The expense is deductible under section 8-1 of the ITAA 1997 and the 'eligible service period' is greater than 12 months. Accordingly, the expense is subject to the timing rules in section 82KZM of the ITAA 1936 and is not fully deductible in the year in which it is incurred.

Where the cost of the insurance or warranty is $1,000 or greater, section 82KZMF of the ITAA 1936 applies to apportion the relevant prepaid expenditure in accordance with the formula below:

Expenditure * [Number of days of eligible service period in the year of income / Total number of days of eligible service period]

For prepayments of insurance premiums, the eligible service period is the period during which the insurance cover is provided.

As you have made a prepayment greater than $1,000 which does not satisfy the 12-month rule, you cannot claim an immediate deduction. You must spread the deduction over the two years comprising the 'eligible service period' that is years four and five of your vehicle ownership.

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