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Subject: racing car depreciation

Question 1

Does the Commissioner consider the racing car was used 100% for a taxable purpose?

Answer

No

Question 2

If it was considered that the racing car was used partly for non-taxable purposes do all expenses need to be apportioned accordingly?

Answer

Yes

Question 3

Can a deduction be claimed for depreciation using the Commissioner's effective life of two years for a racing car?

Answer

Yes

Question 4

Does the motor vehicle depreciation cost limit apply to reduce the amount that can be claimed for depreciation?

Answer

No

Question 5

Is the purchase of the racing car eligible for the General Business Tax Break?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The trust purchased a second hand racing car.

The trustee has been involved in the motor racing industry for many years.

It was the intention and purpose of the trust when acquiring the racing car to earn income from rent and sponsorship of the car and earn profit.

The car is not able to be licensed for use on the road and has been specifically designed as a racing car and not designed for mainly carrying passengers.

The trustee conducted market research on the business of hiring the car.

The trustee has been in the hire business for many years.

A new rule was introduced by the organisers of the championship in 2010 which restricted competitors.

The car was hired X times and driven on other occasions by the trustee.

The trust also received a small amount for advertising via signage on occasions.

The car has not been subject to luxury car tax as it was imported as a racing car and not for road use.

A business plan exists.

The trust expected a profit to be made in the 2009-10, 2010-11 & 2011-12 financial years.

To date the trust has not made a profit.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 8-1(2)

Income Tax Assessment Act 1997 Subsection 40-25(1)

Income Tax Assessment Act 1997 Subsection 40-25(2)

Income Tax Assessment Act 1997 Subsection 40-25(7)

Income Tax Assessment Act 1997 Section 40-40

Income Tax Assessment Act 1997 Section 40-60

Income Tax Assessment Act 1997 Subsection 40-230(1)

Reasons for decision

Question 1

Summary

It is considered the trust used the car for a non-taxable purpose for part of the time it owned the racing car.

Detailed reasoning

Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines that you are entitled to a deduction for the decline in value of a depreciating asset which is used for a taxable purpose.

Subsection 40-25(1) of the ITAA 1997 states you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year.

Subsection 40-25(2) of the ITAA 1997 states you must reduce your deduction by the part of the asset's decline in value that is attributable to your use of the asset, or your having it installed ready for use, for a purpose other than a taxable purpose.

Subsection 40-25(7) of the ITAA 1997 outlines the meaning of taxable purpose.

A taxable purpose is:

(a) the purpose of producing assessable income; or

(b) the purpose of exploration or prospecting; or

(c) the purpose of mining site rehabilitation; or

(d) environmental protection activities.

In this case the trust purchased the racing car for hiring out to drivers (used for the purpose of producing assessable income). The car was entered into races but was only hired out to other drivers on X of those occasions. The trust received assessable income from the X occasions. The trustee drove the car on the other occasions. Given the trustee's interest and involvement in the racing industry over many years we don't accept the use of the racing car was 100% business related, consequently the trust did not use the car for producing assessable income for 100% of the time it owned the car.

Question 2

Summary

The Commissioner considers the trust used the car for part of the time for non-taxable purposes and therefore all expenses in relation to the car must be apportioned between the purpose of producing assessable income and the non-income producing other purpose. The Commissioner also considers it fair and reasonable to limit all expenses incurred in relation to the racing car to the amount of the assessable income received because of the non-taxable purpose.

Detailed reasoning

Section 8-1 of the ITAA 1997 states you can deduct from your assessable income any loss or outgoing to the extent that:

(a) it is incurred in gaining or producing your assessable income; or

(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Subsection 8-1(2) of the ITAA 1997 states however, you cannot deduct a loss or outgoing under this section to the extent that:

(a) it is a loss or outgoing of capital, or of a capital nature; or

(b) it is a loss or outgoing of a private or domestic nature; or

(c) it is incurred in relation to gaining or producing your ^*exempt income or your ^*non-assessable non-exempt income; or

(d) a provision of this Act prevents you from deducting it.

In this case expenses incurred in relation to the racing car activity which are used to produce assessable income are deductible, however the trust is prevented from deducting expenses which are incurred for reasons other than gaining assessable income. It is considered the trust used the car for purposes other than for producing assessable income and therefore all expenses in relation to the car must be apportioned between the purpose of producing assessable income and other purposes.

Further to the apportionment of all expenses as outlined above, the issue of your subjective purpose, motive or intention in determining the deductibility of losses or outgoings must be considered. Taxation Ruling TR 95/33 provides guidance on this matter.

As outlined in TR 95/33 expenditure will generally be deductible under subsection 51(1) of the Income Tax Assessment Act 1936 (ITAA 1936) (now section 8-1 of the ITAA 1997) if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce the taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature. The essential character of an expense is a question of fact to be determined by reference to all the circumstances.

If an outgoing produces an amount of assessable income greater than the amount of the outgoing, there would normally be no need to examine the taxpayer's subjective thought processes (i.e. motives and intentions) in characterising the outgoing as falling within the first limb of subsection 51(1) of the ITAA 1936.

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.

· 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.

· 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, for example, 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 (Fletcher).

The principles adopted in Fletcher are not limited to artificial tax avoidance schemes and apply generally to all cases involving the application of the first limb of subsection 51(1) of the ITAA 1936.

When it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances (Ronpibon Tin (1949) 78 CLR 47 at 59; 8 ATD 431 at 437). In Fletcher, which was a first limb situation, it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year.

As stated above, it is considered the trust had another purpose besides producing assessable income, even though the trust may have been advertising the availability of the car for hire, the trustee drove the car on other occasions and given his involvement in the racing industry for many years it is considered he received enjoyment and pleasure from driving the vehicle on those occasions. The Commissioner considers it fair and reasonable to limit all expenses incurred in relation to the racing car to the amount of the assessable income received because of the trust's subjective purpose of the trustee driving the car.

Question 3

Summary

A deduction can be claimed by the trust using the Commissioner's effective life of two years. The period when depreciation can be claimed for the car commenced when the trust first held the car. As discussed in question 2, the expense must be apportioned between taxable and non-taxable purpose. Furthermore, the total expenses claimed are limited to the amount of assessable income received.

Detailed reasoning

Subsection 40-25(1) of the ITAA 1997 states you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year.

Section 40-40 outlines the meaning of the term "to hold a depreciating asset". It further identifies the kind of depreciating asset is held by a specified entity. It states the owner of any depreciating asset is held by the legal owner.

Section 40-60 of the ITAA 1997 outlines when a depreciating asset starts to decline in value. It states a depreciating asset you hold starts to decline in value from when its start time occurs. The start time of a depreciating asset is when you first use it, or have it installed ready for use, for any purpose.

In this case the trust began to hold the car from the day it was purchased and is entitled to claim a deduction for depreciation from that date.

As the trust is entitled to claim depreciation using the Commissioner's effective life of two years, the issue of whether the trust can claim depreciation for the Commissioner's effective life of 8 years for a motor vehicle is irrelevant. The trust also asked if the car couldn't be depreciated does a capital loss arise upon the sale of the car. As the trust is entitled to claim depreciation, the above issue will not be addressed.

Question 4

Summary

The trust is not limited by the car limit because it is not a car designed mainly for carrying passengers.

Detailed reasoning

Subsection 40-230(1) of the ITAA 1997 states 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 you started to hold it if its cost exceeds that limit.

In this case the racing car, which is owned by the trust, is not designed mainly for carrying passengers therefore the cost limit does not apply.

Question 5

Summary

The trust is not entitled to a deduction under Division 41 of the ITAA 1997 Small Business and General Tax Break (tax break) as it purchased a second hand racing car.

Detailed reasoning

The tax break provides business entities an additional tax deduction for investment in eligible new, tangible depreciating assets acquired between 13 December 2008 and on or before 31 December 2009 and installed ready for use on or before 31 December 2010 and is outlined under Division 41.

In application to this case, the previous owner raced the car. The trust purchased the second hand racing car. As the car was not a new asset the trust is not entitled to claim the tax break deduction under Division 41 of the ITAA 1997.