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Ruling

Subject: Motor vehicle expenses

Question

Are you entitled to a deduction of 100% of the motor vehicle expenses incurred because of business advertising attached to the car?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You run a business in part of the premises where you live.

You have placed large car (advertising) stickers on your car.

You have obtained numerous customers who have made appointments after seeing the car.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

You are only entitled to a deduction for the motor vehicle expenses incurred while your car is used for business purposes as the advertising placed on your car does not change the fundamental purpose of using the car.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all loses 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. Accordingly, motor vehicle expenses are deductible if they are incurred in the course of deriving assessable income.

In addition, motor vehicle expenses incurred by employees, self-employed persons or directors of companies must generally comply with special substantiation rules (Division 28 of the ITAA 1997). Deductions for car expenses, being based on usage or trips made, mean that the purpose of the travel has always been the major factor in determining deductibility.

In the case, Berret v FC of T (1999) 41 ATR 1262;99 ATC 2127, the car expense claimed was disallowed on the basis of a lack of nexus to earning assessable income. Accordingly, a claim for motor vehicle expenses must be related to the use of the car trips made.

It is also considered that the mere carriage of signage, of itself does not change the above application of interpreted law regarding care use. In Taxation Determination TD 92/162 Income Tax: is the cost of a corporate box with associated advertising signs allowable as a deduction, the mere fact that a corporate box carried advertising material was not sufficient to make the whole cost of the box deductible as an advertising expense. The corporate box constituted the provision of entertaining and was therefore denied deductibility under subsection 51AE(4) of the Income Tax Assessment Act 1936 (ITAA 1936). Similarly, the carriage of signage on the car cannot, of itself, overcome the dominant private aspect of a trip, regardless of the advertising intent.

Taxation Ruling TR 95/33 considers the Full High Court decision of Fletcher & Ors v FC of T 91 ATC 4950; (1991) 22 ATR 613. Although it considers deductibility under subsection 51(1) of the Income Tax Assessment Act 1936, which is now equivalent to section 8-1 of the ITAA 1997, the concept of intention is also relevant to your claim.

Paragraph 2 of TR 95/33, states that the essential character of an expense is a question of fact which is to be determined by reference to all the circumstances involved. Paragraphs 4 to 6 further states:

4. However, if the outgoing produces no assessable income, or the amount of assessable income is less than the amount of the outgoing, it may be necessary to examine all the circumstances surrounding the expenditure to determine whether the outgoing is wholly deductible. This may, depending on the circumstances of the particular case, include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing.

5. If, after weighing all the circumstances, including the direct and indirect objectives and advantages, in a commonsense and practical manner, it can be concluded that the expenditure is genuinely, and not colourably, used in an assessable income producing activity, a deduction is allowable for the loss or outgoing.

6. If it is concluded that the disproportion between the outgoing and the relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective (e.g., to derive exempt income or the obtaining of a tax deduction), then the outgoing must be apportioned between the pursuit of assessable income and the other objective: see Fletcher at 91 ATC 4957-8; 22 ATR 621-3.

You have attached advertising stickers on your car. If the vehicle was driven for no other reason other than to promote the business' services, it may be argued that the expenses associated with using the vehicle for that purpose would be deductible. However, where the vehicle is used for purposes other than business promotional reasons, the purpose of the trips made must be examined to ascertain their true and dominant purpose, for example, shopping, transport of family members and other private trips would therefore be private or domestic in nature, irrespective of any ancillary consideration or purpose. As discussed earlier, the travel is not considered to be undertaken in the course of generating the net income of the business.

Consequently, such travel is not part of business use and the advertising is incidental to the normal use of the motor vehicle rather than the vehicle being used for the dominant purpose of advertising, therefore, deductions will be limited to the amount that the vehicle is used for business trips.