Edited version of private advice

Authorisation Number: 1051822554242

Date of advice: 30 April 2021

Ruling

Subject: Car limit

Question 1

Is XXX entitled to claim depreciation on the cost of a Toyota Landcruiser Wagon VX beyond the car limit provided under section 40-230 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is XXX entitled to claim depreciation on the costs of modifications, delivery and tyres/rims for the Toyota Landcruiser Wagon VX under section 40-190 of the ITAA 1997?

Answer

Yes. These would fall within second element costs.

Question 3

Is XXX entitled to a full GST credit of the GST paid on the acquisition of the Toyota Landcruiser Wagon VX under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No, XXX is not entitled to full GST credit on the acquisition of the Toyota Landcruiser Wagon VX. They are only entitled to claim the amount of GST credit at 1/11 of the car limit.

XXX is entitled to claim a full GST credit for the modifications, freight/delivery and tyres/rims costs for the Toyota Landcruiser Wagon VX.

This ruling applies for the following period:

Year ending 30^th June 20XX

Relevant facts and circumstances

XXX (you) is registered for GST.

You purchased a Toyota Landcruiser Wagon VX 4.5L T Diesel Automatic (the Vehicle).

You have indicated that you use the Vehicle solely for business use.

You provided a tax invoice which shows you purchased the Vehicle.

The Vehicle is marketed by the Dealership as a SUV when unmodified.

You provided a tax invoice which shows modifications including an upgraded load carrying capacity made to the Vehicle by the Modifier.

You provided invoices for costs of delivery and new tyres/rims for the Vehicle.

The modifications included a new compliance plate from a 'Second Stage Manufacturer' which overrides the original manufacturers plate.

The vehicle brochure from Toyota lists the specifications of the Vehicle prior to modification:

•         Towing, Maximum Unbraked - 750 kg

•         Towing, Maximum Braked - 3,500 kg

•         Kerb Weight - 2,740 kg

•         Gross Vehicle Mass (GVM) -3,350 kg

•         Fuel Consumption - 9.5 L/100 km

•         Seating Capacity - 7

After the modifications were completed the Road Vehicle Certification System lists the specifications of the Vehicle as:

•         Towing, Maximum Unbraked - 750 kg

•         Towing, Maximum Braked - 3,500 kg

•         Kerb Weight - 2,635 kg

•         Gross Vehicle Mass (GVM) - 4,495 kg

•         Fuel Consumption - Not specified

•         Seating Capacity - 5

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-175

Income Tax Assessment Act 1997 section 40-180

Income Tax Assessment Act 1997 section 40-185

Income Tax Assessment Act 1997 section 40-190

Income Tax Assessment Act 1997 section 40-230

A New Tax System (Goods and Services Tax) Act 1999 subdivision 9-A

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 subsection 69-10(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 69-10(4)

A New Tax System (Luxury Car Tax) Act 1999 subsection 25-1(2)

Reasons for decision

Question 1

Section 995-1 of the ITAA 1997 defines 'car' as a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than one tonne and fewer than nine passengers, and defines 'motor vehicle' as any motor-powered road vehicle (including a 4 wheel drive vehicle).

The Vehicle meets this definition of a car as it is designed to carry a load of less than one tonne and carry fewer than nine passengers.

Section 40-25 of the ITAA 1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for the purpose of producing assessable income.

Section 40-175 of the ITAA 1997 states:

The cost of a depreciating asset you hold consists of 2 elements.

Subsection 40-180(1) states:

The first element is worked out as at the time when you began to hold the depreciating asset (except for a case to which item 3, 4 or 14 of the table in subsection (2) applies). It is:

(a)  if an item in that table applies - the amount specified in that item; or

(b)  otherwise - the amount you are taken to have paid to hold the asset under section 40-185

Subsection 40-180(1) states:

If more than one item in this table covers the asset, apply the last item that covers it.

Section 40-190 further states:

The second element is worked out after you start to hold the depreciating asset.

The second element is:

(a)  the amount you are taken to have paid under section 40-185 for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since you started to hold the asset; and

(b)  expenditure you incur that is reasonably attributable to a balancing adjustment event occurring for the asset.

Example 1:

Andrew adds a new tray and canopy to his ute. The materials and labour that go into the addition are economic benefits that Andrew received and that contribute to the ute's present condition.

The payments he makes for those economic benefits are included in the second element of the ute's cost.

Subsection 40-230(1) of the ITAA 1997 states that the first element of the cost of a car designed mainly for carrying passengers is reduced to the car limit for the financial year in which the entity started to hold it, if its cost exceeds the car limit.

The car limit for the 2020-21 financial year is $ 59,136.

Designed mainly for carrying passengers

As mentioned above, the first element of the cost of a car designed mainly for carrying passengers is reduced to the car limit if its cost exceeds the car limit.

Taxation Determination TD 94/19 states that in determining the principle purpose for which a vehicle (other than a dual cab or crew cab) is designed, regard should be had to factors including, but not limited to:

•         the appearance and presentation of the vehicle

•         any relevant promotional literature

•         the emphasis evident in marketing

•         the vehicle's specifications

•         load carrying capacity

•         passenger carrying capacity

In determining the principle purpose for which the unmodified vehicle is designed, we had regard to the following factors:

•         the unmodified vehicle is a 4x4 wheel drive station wagon with the appearance and presentation of a passenger vehicle

•         interior configuration supports that the unmodified vehicle is not primarily designed for carrying goods:

-        Seating capacity of seven; seated in three rows

-        Emphasis is on passenger comfort; Leather accented interior with woodgrain-look highlights

-        Power adjustable driver and front passenger seats

-        Driver seat power lumbar support

-        Passenger assist grips and grab handles

-        Driver and passenger side steps

•         the unmodified vehicle has the latest technological innovations and luxury features, notably:

-        Four zoned climate control for passenger comfort

-        Moonroof

-        10 SRS airbags, driver and front passenger SRS frontal, knee, first row side and first, second and third row curtain airbags

•         towing capacity is 3,500kg (with a braked trailer) [1]

The above factors lead to a conclusion that the Vehicle is not designed for the principle purpose of carrying goods for business or trade but is a car that is designed mainly for carrying passengers.

Applying the car cost limit

Before applying the car cost limit, the cost of the car must be:

a)    increased by the discount on a trade-in (where applicable); and

b)    reduced by the amount of any input tax credit the entity is entitled to.

The reduced cost is then further reduced to the car limit of $ 59,136.

Exceptions

Subsection 40-230(2) of the ITAA 1997 provides that the car limit does not apply to a car:

•         fitted out for transporting disabled people in wheelchairs for profit (for example specially modified taxis); or

•         whose first element of cost exceeds the car limit only because of modifications made to enable an individual with a disability to use the car for a taxable purpose.

The Vehicle does not fit into these exception categories.

The Commissioner has no discretion regarding the application of the car limit.

In conclusion,the car limit applies for the purpose of calculating the deductions for the "Toyota Landcruiser Wagon VX 4.5L T Diesel Automatic"' decline in value.XXX is not entitled to claim a depreciation deduction or capital allowance on the Vehicle beyond the car limit provided under section 40-230 ITAA 1997

Accordingly, the first element of the cost of the Vehicle is $ 59,136 being the car limit for the 20XX-XX financial year.

Question 2

Modifications - Second Element

The following factors are relevant in determining whether the costs to modify the Vehicle are considered to fall within the second element:

•         the modifications were undertaken by a Modifier and not the Dealer;

•         the invoice for the modifications was issued by the Modifier; and

•         the Dealer has no warranty liability on the modifications undertaken by the Modifier.

These factors lead to a decision that the cost of the modifications to the Vehicle, are separate to the purchase of the Vehicle and would be considered as second element costs as per section 40-190 ITAA 1997.

In conclusion, the cost of the modifications, freight/delivery and tyre/rims for the Vehicle are considered to be second element costs and XXX is entitled to claim a depreciation deduction or capital allowance on the full amount of these costs.

Question 3

Under section 11-20 of the GST Act you are entitled to GST credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

a)    you acquire anything solely or partly for a creditable purpose,

b)    the supply of the thing to you is a taxable supply,

c)    you provide, or are liable to provide, consideration for the supply, and

d)    you are registered or required to be registered for GST.

Under subsection 11-5(b) the meaning of 'supply' is provided in subdivision 9-A of the GST Act which is considered in further detail in Goods and Services Tax Ruling GSTR 2006/9 Goods and services tax: supplies.

Applying each of the propositions in GSTR 2006/9 to the facts provided, we consider that there is one arrangement under which two separate taxable supplies to you are made:

1 The supply of the (unmodified) Vehicle to you by the Dealer; and

2 The supply of modification services to you by the Modifier.

Under subsection 11-15(1) of the GST Act you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

However, under subsection 11-15(2) of the GST Act you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to you making supplies that would be input taxed or the acquisition is of a private or domestic nature.

The amount of GST credit for a creditable acquisition is equal to the GST payable on the supply of thing acquired unless:

1.    the acquisition is partly creditable; in which case, the GST credit is worked out based on the extent of the creditable purpose, or

2.    subsection 69-10(1) of the GST Act applies.

Subsection 69-10(1) of the GST Act limits the amount of GST credit for a creditable acquisition or creditable importation of a 'car'. Where the GST inclusive market value of the 'car' exceeds the 'car limit' for the financial year in which you first used the car for any purpose, the amount of GST credit is 1/11th of that limit.

For the purpose of subsection 69-10(1) of the GST Act, a 'car' and the 'car limit' refers to the ITAA 1997 sections 995-1 and 40-230 respectively.

As explained in the reasoning for Question 1, the unmodified Vehicle is treated as being a car designed for the principle purpose of carrying passengers. Therefore, as the Vehicle is a car designed mainly for carrying passengers it is not exempt from the car limit under subsection 69-10(1) of the GST Act.

However, subsection 69-10(1) applies unless it is excluded by subsection 69-10(4) of the GST Act.

Subsection 69-10(4) provides subsection 69-10(1) does not apply to a vehicle that is not a luxury

car under subsection 25-1(2) of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act).

Section 27-1 of the LCT Act defines 'car' as a motor vehicle (except a motor cycle or similar vehicle) that is designed to carry a load of less than 2 tonnes and fewer than 9 passengers and defines motor vehicle as a motor-powered road vehicle (including a 4 wheel drive vehicle).

Section 25-1 of the LCT Act provides that a car is not a luxury car if it is a commercial vehicle that is not designed for the principle purpose of carrying passengers.

Subsequently, subsection 69-10(4) of the GST Act does not exclude the application of subsection 69-10(1) to your GST credits claim on your vehicle.

In conclusion, the unmodified Vehicle was purchased from the Dealer for a total GST inclusive price which exceeds the 'car limit' for the 20XX-20XX financial year at $59,136. Therefore, XXX is entitled to claim only the amount of GST credit at 1/11th of the car limit.

For the second supply of modification services, freight/delivery and tyres/rims, XXX is entitled to claim a full GST credit on these costs for the Toyota Landcruiser Wagon VX.

[1] https://www.toyota.com.au/-/media/toyota/main-site/vehicle-hubs/lc200/files/lc200_spec_table_dec2019.pdf

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