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Ruling

Subject: Deduction- Decline in value

Question 1

Is vehicle X considered a car for depreciation purposes?

Answer:

No

Question 2

Can the entity claim a deduction for the decline in value when vehicle X is used for a taxable purpose?

Answer:

Yes.

Question 3

Can the entity claim deductions for meal expenses when the entity travels away for work purposes?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The entity operates a business in city A.

The entity has a separate bank account to pay for the expenses incurred in operating the business.

Due to having to source work outside city A, the entity plans to purchase vehicle X to use as accommodation at the worksites in locations outside city A.

Vehicle X will be an asset of the entity.

Vehicle X is designed to carry a load of more than one tonne.

Vehicle X will be used to transport the entity's equipment to various worksites.

The entity expects to incur food expenses when its workers are required to travel away to work outside city A.

The entity expects the length of stay at various worksites outside city A to be on a short term basis.

Vehicle X will also be used for private purposes.

The entity will keep a log book for the use of vehicle X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-25

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

Income Tax Assessment Act 1997 section 40-175

Income Tax Assessment Act 1997 section 40-180

Income Tax Assessment Act 1997 section 40-225

Income Tax Assessment Act 1997 paragraph 40-230(1)(b)

Income Tax Assessment Act 1997 subsection 995-1(1)

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.

Decline in value

Generally, the purchasing of plant and equipment is of a capital nature and is deducible under Division 40 of the ITAA 1997.

Section 40-25 of the ITAA1997 allows a deduction for the decline in value of a depreciating asset to the extent that it is used for a taxable purpose.

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.

A depreciating asset's cost consists of two elements under section 40-175 of the ITAA 1997.

First Element

The first element is worked out at the time you begin to hold the asset and is generally the amount you paid for it (section 40-180 of the ITAA 1997). Included in the cost of the first element are items such as the delivery and installation costs.

Second Element

The second element generally consists of amounts paid since you started to hold the asset that have contributed to its present condition and location according to section 40-190 of the ITAA 1997.

The first element of the cost of certain cars is subject to a limit. Subsection 40-230(1) provides that the first element of the cost of a car designed mainly for carrying passengers (after applying section 40-225 and Subdivision 27-B) is reduced to the car limit for the financial year in which the taxpayer started to hold it, if its cost exceeds that limit.

5. The term 'car' is defined in subsection 995-1(1) to mean '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.' If a motor home is designed to carry a load of one tonne or more, it is not a 'car' as defined in subsection 995-1(1). Therefore, section 40-230 of the ITAA 1997 would not apply.

In your case, vehicle X is not considered a car for the purposes of section 40-230 of the ITAA 1997 as it is designed to carry more than one tonne. Therefore, the car limit does not apply for the purposes of working out vehicle X's decline in value.

Where the entity's uses vehicle X to undertake travel to engage in work for the business, for the purpose of producing assessable income, the entity can deduct an amount for its depreciation under section 40-25 of the ITAA 1997. However, the deduction should be reduced by an amount that reasonably reflected the time when vehicle X is not used for a taxable purpose in the entity's business activities.

Food expenses

Various court decisions have concluded that, generally, accommodation and food expenses incurred while away from home are essentially 'living expenses' of a private or domestic nature and therefore not deductible (Federal Commissioner of Taxation v. Cooper 91 ATC 4396; (1991) 21 ATR 1616; Federal Commissioner of Taxation v. Toms 89 ATC 4373; (1989) 20 ATR 466).

The occasion of the outgoing may give the expenditure the essential character of an income producing expense. An example is where the expenditure is incurred while away from home overnight on a work related activity.

Where a taxpayer is away from home overnight in connection with an income producing activity, accommodation and meals expenses incurred are deductible under section 8-1 of the ITAA 1997. The expenditure is not considered private because its occasion is the taxpayer's travel away from home on income-producing activities.

There may be exceptions to the general rule.

In Roads and Traffic Authority of NSW v. FC of T 93 ATC 4508 at 4521; (1993) 26 ATR 76 at 92 workers required to camp at the work site were paid a camping allowance. It was necessary to consider whether expenditure on meals in the circumstances would have been deductible under section 8-1 of the ITAA 1997. Hill J stated that:

An employee who had no private home and was employed indefinitely to work at a particular site and did in fact work for the whole of his employment at that site, might be said to have chosen to live at the site so that the cost of his accommodation there would be private.

In this case, it is expected that workers will travel away for short periods of time to undertake income producing activities for the business. Generally, people travelling on work typically use short term accommodation such as a hotel. The use of these premises is short term in nature and can be attributed to the need to travel for income producing reasons. The transient use confers a dominant income producing purpose on what would otherwise be private expenses. Similarly in the entity's case, the use of vehicle X is be attributed to the need to travel for income producing reasons. Therefore, the costs attributed to the purchase of the food whilst the workers are travelling overnight on business for the entity is deductible under section 8-1 of the ITAA 1997.