Edited version of private ruling

Authorisation Number: 1011473744481

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Ruling

Subject: Motor vehicle expenses

Questions and answers:

Are expenses for the damage to third party motor vehicles tax deductible in financial year X?

No

Are expenses for the damage to third party motor vehicles tax deductible in financial year Y?

Yes

Is the balance of motor vehicle finance that needs to be paid out tax deductible on the written down cost of the car in financial year X?

No

Is the balance of motor vehicle finance that needs to be paid out tax deductible on the written down cost of the car in financial year Y?

No

This ruling applies for the following period:

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on:

1 January 2009

The scheme that is the subject of this ruling

You are a salaried partner of a law firm.

You travel to and from your office to visit clients and to attend court cases.

During work travel in year X, a car accident occurred involving you and resulting in damage to your motor vehicle and to two third party motor vehicles.

Your motor vehicle cannot be repaired.

Your motor vehicle was uninsured and financed through a company as a hire purchase arrangement.

You are liable for all damage caused to third parties and for the remaining balance owing on the finance of your own vehicle.

You have not made the final payment off your hire purchase agreement as you do not have the money.

There is no written agreement in place with your employer with regards to who is liable for any damages caused by an employee using the motor vehicle for work- related expenses.

It is expected that employees have a total responsibility for car expenses.

You have previously only claimed motor vehicle expenses using the cents per kilometre method due mainly to the lower substantiation requirements.

Since becoming a partner in the legal practice, the level of travel to and from clients and also between the courts in various locations, as well as between the relevant offices of the firm have increased the kilometres and the likely business percentage.

You will be using the one third of actual expenses method for the year X.

You will be using the logbook method for year Y.

You have been issued invoices in relation to the write off of personal vehicle and write offs and repairs of the two third party vehicles.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 240-55

Income Tax Assessment Act 1997 Section 240-50

Income Tax Assessment Act 1997 Section 240-85

Reasons for decision

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.

Third party motor vehicle damages

Expenditure in the form of compensation or damages paid to third parties will be an allowable deduction under section 8-1 of the ITAA 1997 to the extent that it is incurred in the course of gaining or producing assessable income, and the expense is not of a capital, private or domestic nature.

In Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236 (Ronpibon's Case), the High Court stated that for an expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end.

In Case T22 86 ATC 223; (1986) 29 CTBR (NS) Case 25 a lawn mowing contractor caused a motor accident while driving in the course of his work. In making its decision, the Board of Review applied the 'incidental and relevant' test from the decision of the High Court in Ronpibon's Case and held that the payments made to the other parties involved in the accident were deductible as the expenses were 'incidental and relevant' to the gaining or producing of the taxpayers assessable income. The Board of Review further stated that 'the expenses were clearly not...outgoings of a capital, private or domestic nature'.

Although the decision in the above Board of Review case was made in reference to the second limb of subsection 51(1) of the Income Tax Assessment Act 1936 it is considered that it has equal application to both limbs of section 8-1 of the ITAA 1997.

The taxpayer was travelling in the course of his work when the accident occurred. As the accident occurred in the course of producing assessable income, the expenses associated with the liability to pay for the damage to the other vehicle involved in the accident are incidental and relevant to the production of that assessable income and are not of a capital, private or domestic nature.

Therefore, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997, for costs incurred as a result of damage caused to another vehicle involved in a motor vehicle accident that happened during the course of the taxpayer's employment.

Deductibility of finance

Division 240 of the ITAA 1997 deals with hire purchase agreements as defined in subsection 995-1(1) of the ITAA 1997. the broad scheme of the division is to treat such hire purchase agreements as a sale of the relevant goods to the hirer (notional buyer) combined with a loan from the supplier (notional seller) to the notional buyer.

In this instance you were the notional buyer and the finance provider was the notional seller under the hire purchase agreement (section 240-17 of the ITAA 1997).

Payments made under hire purchase agreements and termination payments made at the end of hire purchase agreements are specifically made not deductible by sections 240-55 and 240-85 of the ITAA 1997.

Even if these sections did not apply to your final payment, a deduction would not be allowed under section 8-1 of the ITAA 1997 as the final payment is considered to be capital in nature. This is because it is a payment made towards the purchase of an asset rather than a recurring type expense.

There fore it is concluded that a deduction is not available in respect of your final payment.

You may be entitled to a deduction for notional interest on your final payment under section 240-50 of the ITAA 1997.

Timing of deduction

Taxation Ruling TR 97/7 sets out general rules to assist in defining whether and when a loss or outgoing has been incurred for the purposes of section 8-1 of the ITAA 1997. In general, a loss or outgoing has been incurred where a taxpayer is completely subjected to the loss or outgoing (that is, the liability is not merely contingent, pending or expected), and there is a presently existing liability to pay a pecuniary sum.

You can claim a deduction in the year in which you incur the expense.

In your case you have received invoices in relation to the damage to third party motor vehicles.

As these invoices are the basis of you incurring the expense deductions relating to the third party motor vehicles can be claimed in financial year Y.

You have not paid the final amount off your motor vehicle. As you have not made payment no deduction is claimable.