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Ruling

Subject: Goods and Services Tax (GST) and entitlement to input tax credits beyond car limit

Question

Is the input tax credit for your creditable acquisition of a particular vehicle subject to the limit under section 69-10 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the input tax credit for your creditable acquisition of a particular vehicle is subject to the limit under section 69-10 of the GST Act.

Relevant facts and circumstances

You are registered for GST.

You are carrying on an enterprise that requires a motor vehicle to tow a large load which is towed to various locations. Due to the size of the load there are very few vehicles that are rated sufficiently for towing.

In the 2010-11 financial year, you purchased a particular vehicle. You advised that the towing capacity of the vehicle is the equal highest of any vehicle in its class and required for your purposes.

The purchase price of the car was more than the car limit.

The car limit for the 2010-11 financial year is $57,466.

You advised that for security reasons you wanted a vehicle with a lockable cabin rather than a utility style vehicle to store and carry your equipment.

You advised the vehicle's gross vehicle weight and kerb weight. Furthermore, you advised that the total load carrying capacity is less than one tonne and is designed to carry less than nine passengers.

You advised that when the features of the car are considered there are a number of factors that are promoted apart from the ability to carry passengers. The vehicles performance allows the "vehicle to go almost anywhere and tow practically anything". You consider that these two factors, that is the ability to tow and the "go anywhere" ability, are what the vehicle has been principally designed for. You further stated that when all factors are considered, you believe that the purpose of carrying passengers is only one of the design factors and not the principal or main factor.

You have not provided the Australian Taxation Office (ATO) with any promotional material about the vehicle but advised that details about the vehicle can be obtained from the manufacturer's website.

A full list of the specifications is available from the manufacturer's website. This also shows that there is folding rear seat back 40/60.

Some of the promotional materials which includes an e-brochure are also on the manufacturer's website.

You advised that the vehicle is a business asset of the partnership.

It will be used wholly in your business and there is no private use.

A tax invoice is held for the vehicle which was purchased from a dealer. It was purchased wholly within Australia and not imported.

It is not held as trading stock and is not held for hire or lease.

It is not held in order to carry out research and development for the manufacturer of the car and is not to be exported.

It is not an emergency vehicle or a motor home or campervan, or a vehicle specifically fitted out for transporting disabled people seated in wheelchairs.

You advised that it is not a dual cab or a crew cab or a utility vehicle.

You confirmed that the promotional material does not refer to the vehicle as designed for transporting or carrying goods. However you advised there is a reference to its towing capacity and it's off road capability.

You would describe the vehicle as a four wheel drive and not a sports utility vehicle.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 69-10,

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1,

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 Section 11-15,

Income Tax Assessment Act 1997 Section 995-1,

A New Tax System (Luxury Car tax) Act 1999 Section 9-5 and

A New Tax System (Luxury Car tax) Act 1999 Subsection 25-1(2).

Reasons for decision

Section 11-20 of the GST Act provides that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

(a) you acquire anything solely or partly for a *creditable purpose; and

(b) the supply of the thing to you is a *taxable supply; and

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

(d) you are *registered, or *required to be registered.

(* denotes a term defined in section 195-1 of the GST Act)

Subsection 11-15(1) of the GST Act states that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. However, pursuant to subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that:

(a) the acquisition relates to making supplies that would be input taxed, or

(b) the acquisition is of a private or domestic nature.

Based on the information provided, you purchased the particular vehicle to use in carrying on your business. You advised that the vehicle is a business asset and will be used to tow your equipment which is towed to various locations.

Accordingly, you have acquired the vehicle for a creditable purpose to the extent that you acquired it in carrying on your enterprise. No part of the acquisition relates to making input taxed supplies. If the vehicle is used for private use then it will be partly creditable. However you have advised that the vehicle is be used wholly for business use and there is no private use. The supply of the motor vehicle to you is a taxable supply, you provided consideration for the vehicle and you are registered for GST. The acquisition of the motor vehicle therefore is a creditable acquisition as you met all the requirements of section 11-5 of the GST Act.

However, subsection 69-10(1) of the GST Act limits the amount of the input tax credits available for creditable acquisitions of certain cars.

Subsection 69-10(1) of the GST Act states:

If:

(a) you are entitled to an input tax credit for a *creditable acquisition or *creditable importation of a *car; and

(b) you are not, for the purposes of the A New Tax System (Luxury Car Tax) Act 1999, entitled to quote an *ABN in relation to the supply to which the creditable acquisition relates, or in relation to the importation, as the case requires; and

(c) 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 the input tax credit on the acquisition or importation is the amount of GST payable on the supply or importation of the car up to 1/11 of that limit.

A 'car' is defined in section 195-1 of the GST Act to have the same meaning given by section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 995-1 of the ITAA 1997 provides that a car means, 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.

Section 995-1 of the ITAA 1997 provides that a motor vehicle means any motor-powered road vehicle (including a four wheel drive vehicle).

We therefore need to first determine whether the particular vehicle is a 'car' as defined. Whether a vehicle satisfies the definition of 'car', depends on the nature of the vehicle and its inherent design rather that the use to which the particular vehicle is put.

The designed load capacity of a motor vehicle is to be taken as the gross vehicle weight reduced by the basic kerb weight of the vehicle. As such, the load carrying capacity of the particular motor vehicle is less than one tonne.

The particular vehicle is a four wheel drive vehicle designed to carry a load of less than one tonne and fewer than nine passengers and as such is considered to be a car as defined for the purposes of the GST Act.

Accordingly, as the particular vehicle is a car as defined and the acquisition of the car is a creditable acquisition as outlined above therefore the requirement of paragraph 69-10(1)(a) of the GST Act is satisfied.

In relation to paragraph 69-10(1)(b) of the GST Act, section 9-5 of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act), sets out the circumstances in which one can quote an ABN in relation to the supply of a luxury car. Section 9-5 of the LCT Act states:

(1) You are entitled to *quote your *ABN in relation to a supply of a *luxury car or an *importation of a luxury car if, at the time of quoting, you have the intention of using the car for one of the following purposes, and for no other purpose:

(a) holding the car as trading stock, other than holding it for hire or lease; or

(b) *research and development for the manufacturer of the car; or

(c) exporting the car in circumstances where the export is *GST-free under Subdivision 38-E of the *GST Act.

(2) However, you are not entitled to *quote unless you are *registered.

In your case you did not purchase the particular vehicle with the intention of using it for one of the following purposes:

§ holding the car as trading stock;

§ research and development for the manufacturer of the car; or

§ exporting the car.

Therefore, you are not entitled to quote your ABN in relation to the supply made to you of the car in question under the LCT Act when you purchased the car. For this reason the requirement of paragraph 69-10(1)(b) of the GST Act is also met.

The requirement of paragraph 69-10(1)(c) of the GST Act is satisfied as you advised that the purchase price of the particular vehicle exceeds $57,466 being the car limit for the 2010-11 financial year.

Consequently, all the requirements of subsection 69-10(1) of the GST Act are met.

Having met the requirements of subsection 69-10(1) of the GST Act we now need to consider the exceptions in section 69-10 of the GST Act. In particular and of relevance is subsection 69-10(4) of the GST Act which provides that section 69-10 does not apply to limit the amount of the input tax credits available for creditable acquisitions of certain cars in relation to:

(a) The acquisition or importation of a *car that is not a*luxury car because of subsection 25-1(2) of the A New Tax System (Luxury Car Tax) Act 1999; or

Note: Emergency vehicles, cars fitted to transport disabled people, non-passenger commercial vehicles, motor homes and campervans are not luxury cars under that subsection.

(b) the acquisition of a car by lease or hire.

Paragraph 69-10(4)(b) of the GST Act does not apply as you have not acquired the car by lease or hire.

Subsection 25-1(2) of the LCT Act states:

(2) However, a *car is not a *luxury car if it is:

(a) a vehicle that is specified in the regulations to be an

emergency vehicle, or that is in a class of vehicles that are

specified in the regulations to be emergency vehicles; or

(b) specially fitted out for transporting *disabled people seated in

wheelchairs (unless the supply of the car is *GST-free under

Subdivision 38-P of the *GST Act); or

(c) a commercial vehicle that is not designed for the principal

purpose of carrying passengers; or

(d) a motor home or campervan.

In your case, the particular vehicle is not an emergency vehicle, or specially fitted out for transporting disabled people seated in wheelchairs or a motor home or campervan therefore paragraphs 25-1(2)(a), (b) and (d) of the LCT Act does not apply.

We now need to consider if paragraph 25-1(2)(c) of the LCT Act applies by determining whether the particular vehicle is a commercial vehicle that is not designed for the principal purpose of carrying passengers.

The ATO publication titled Luxury Car Tax NAT 3394 discusses the application of the Luxury Car Tax (LCT) provisions and provides as follows:

What is a commercial vehicle?

For LCT purposes, a commercial vehicle is:

· designed for the principal purpose of carrying goods used for business or trade, and

· not subject to LCT.

These vehicles include:

· trucks

· hearses, and

· some vans.

Vehicles designed mainly for carrying passengers (including paying passengers), or for sport or recreation purposes, are not commercial vehicles and you may have to pay LCT on them.

These vehicles include:

· station wagons

· passenger sedans

· people movers, and

· sports utility vehicles (SUVs).

To work out the main purpose (principal purpose) for which a vehicle has been designed, the things you need to consider include:

· its appearance and presentation

· relevant promotional material and how it is marketed

· its specifications

· the load carrying capacity, and

· the number of passengers it can carry.

This is known as the 'principal purpose test'.

We will now apply the principal purpose test discussed above to work out the principal purpose for which the particular vehicle has been designed.

Appearance and presentation

You advised that for security reasons you wanted a vehicle with a lockable cabin rather than a utility style vehicle to store and carry your equipment.

You advised that due to the size of your work equipment there are very few vehicles that are rated sufficiently for towing. You purchased the particular vehicle as the towing capacity of the vehicle is the equal highest of any vehicle in its class and required for towing the equipment needed for carrying on your business.

It is the inherent design rather that the use to which the particular vehicle is put that will determine principal purpose for which a vehicle has been designed. The features and use described by you will not alter the essential design of the car. Towing capacity is not relevant in determining whether the principal purpose of the vehicle is to carry passengers or goods.

What must be asked is whether the particular vehicle is of a kind designed to carry passengers or goods or both passengers and goods.

In your case the particular vehicle is not a dual cab or crew cab or utility vehicle. The appearance and presentation of the particular vehicle is that of four wheel drive people mover passenger vehicle designed for towing, offroad recreational and other offroad use.

Off road capability is typical of most wagons/ four-wheel drives in the market place. It does not matter that your particular vehicle is used predominantly for business purposes.

The appearance and presentation of the particular vehicle shows that the principal purpose of its design is for the transport of passengers. It is not marketed as principally for the purpose of carrying goods used for business or trade.

The specifications of the particular vehicle in the promotional literature specify a seating capacity of less than nine indicating its inherent design is that of a passenger carrying vehicle.

The passenger seats in the particular vehicle can be folded to increase/maximise the goods carrying space.

Paragraph 5 of Miscellaneous Taxation Ruling MT 2033 provides the following example:

5. Whether a car is of a kind to which the work-related use exemption is capable of applying depends on the vehicle's inherent design rather than the use to which the particular car is put. Thus, for example, the fact that the rear seat of a station wagon may be folded down and service equipment located in the extended rear section is not relevant for the purposes of the exemption, i.e. the car's design remains that of a passenger carrying vehicle.

Therefore, we are of the view that, despite passenger seats which can be folded to provide some additional space, the design of the vehicle remains that of a passenger carrying vehicle.

An analysis of the appearance and presentation of the vehicle has shown no indication that the vehicle is designed for the principal purpose of carrying goods used for business or trade.

It is clear after an examination of all the facts, and examining photographs of the vehicle on the website, that it is designed principally to carry passengers. It does not matter that there is room behind the seats where some goods could be carried, as this is typical of most wagons/ four-wheel drives in the market place; the principal purpose of their design is for the transport of passengers. Therefore, taking into account the overall appearance and presentation of the vehicle, we are of the view that the vehicle is designed principally to carry passengers rather than goods for business or trade.

Promotional material and marketing emphasis

The promotional material may suggest that the vehicle may appeal to the commercial/rural sector, the recreational 4X4 buyer and families.

Although it may appeal to miners, farmers and construction workers the emphasis is on transporting workers across difficult terrain or it's off road capability.

From the promotional material we consider that it is promoted as a passenger vehicle to carry less than nine adults in comfort. The standard features of the vehicle are aimed at safety and comfort of passengers. There is a lack of data in the promotional material to support that the vehicle is a commercial vehicle. There is no evidence that the vehicle is marketed principally for the purpose of carrying goods used for business or trade.

An analysis of the promotional material and marketing emphasis confirms that the vehicle is designed principally to carry passengers rather than a goods carrying vehicle.

Design specifications

The ATO publication titled Luxury Car Tax NAT 3394 discusses that vehicles that may qualify for the LCT exemption are trucks, hearses and some vans or any other road vehicle that, while designed to carry loads of less than two tonnes and fewer than nine passengers, are not designed for the principal purpose of carrying passengers.

Therefore, whether a car is of a kind to which the LCT exemption is capable of being applied depends on the vehicle's inherent design rather than the use to which the particular car is put.

For LCT purposes a car means a motor vehicle designed to carry a load of less than two tonnes and fewer than nine passengers. Therefore, the design of a car is established, broadly, by its load capacity and seating capacity. (Note that the definition of 'car' for LCT purposes is different to the definition of 'car' for GST purposes.)

The design specifications of the particular vehicle indicate that the vehicle is designed to carry a load of less than two tonnes and fewer than nine passengers. Vehicles with these specifications are defined as cars for the purposes of the LCT Act.

We have discussed the design specifications of the particular vehicle in the context of its appearance and presentation, and also the promotional and marketing emphasis. There is, however, no mention of any design specifications which support a conclusion that the vehicle is a commercial vehicle designed for the carrying of goods for business or trade. This indicates that the particular vehicle is designed principally for the carrying of passengers in a luxurious level of comfort.

Load capacity and passenger carrying capacity

Some vehicles with a load capacity of less than two tonnes may be designed to carry both passengers and goods. These dual purpose vehicles include dual cab, crew cab or utility vehicles. On this issue, the ATO publication titled Luxury Car Tax NAT 3394 provides as follows:

Vehicles that carry both passengers and goods

Some vehicles with a load carrying capacity of less than two tonnes can be designed to carry both passengers and goods (that is a dual purpose).

These vehicles include:

· dual cab vehicles

· crew cab vehicles, and

· utility vehicles.

For LCT purposes, the designed passenger carrying capacity is worked out by multiplying the designed seating capacity (including the driver's) by 68kg. This figure is used when applying the Australian Design Rules.

The Vehicle Standard (Australian Design Rule - Definitions and Vehicle Categories) 2005, (ADR), states that a vehicle constructed to carry both people and goods will be considered to be primarily for the carriage of goods if the number of seats multiplied by 68kg is less than 50% of the difference between the 'GVM' and the 'tare mass'.

For more information about Australian Design Rules (ADR), visit the Department of Infrastructure and Transport website at www.infrastructure.gov.au

Example: Working out the main purpose of your vehicle

Brooke supplies a dual cab vehicle to a buyer with seats for five people, including the driver.

The value of the vehicle is more than the LCT threshold and the difference between the 'GVM' and the 'unladen mass' is 960kg. The vehicle appears to have been designed for both the carriage of persons and the carriage of goods (that is a dual purpose).

Brooke then looks at the passenger carrying capacity of the vehicle, which she works out as follows:

o 5 passengers x 68kg = 340kg

o She then finds out if the passenger carrying capacity (340kg) is less than 50% of the difference between the 'GVM' and the 'unladen mass' (960kg).

o 50% X 960 kg = 480 kg

In this instance, because the passenger weight (340kg) is less than 50% of the remaining goods capacity (480kg), Brooke works out that the principal purpose of the vehicle is to carry goods.

If the vehicle has been designed for both the carriage of persons and the carriage of goods (that is a dual purpose) then the methodology outlined above can be applied to determine the principal purpose of the vehicle regardless of any other consideration.

However, the particular vehicle is not a dual cab or crew cab or utility vehicle nor is it a dual purpose vehicle designed for both the carriage of persons and the carriage of goods, accordingly the methodology outlined above cannot be applied.

In conclusion and based on the analysis and weighing up of the principal purpose test it is considered that the particular vehicle is principally designed for carrying passengers only and is therefore not a commercial vehicle.

Accordingly, paragraph 25-1(2)(c) of the LCT Act does not apply which also means that paragraph 69-10(4)(a) also does not apply. In addition, based on the information that you have provided, none of the other exclusions in section 69-10 of the GST Act apply.

Therefore, as:

§ you meet all the requirements of subsection 69-10(1) of the GST Act

§ none of the exceptions in section 69-10 applies, and

§ you use the particular vehicle in carrying on your business

the maximum amount of the input tax credit that you can claim in respect of the particular motor vehicle, is limited to 1/11^th of $57,466.

You should note that the amount of the input tax credit is reduced if the vehicle is only partly creditable.