Edited version of your private ruling

Authorisation Number: 1012460469632

Ruling

Subject: Car expenses

Question 1

Are the payments received for renting your car assessable?

Answer

No.

Question 2

Are you entitled to a deduction for the associated car expenses?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

I July 2012

Relevant facts

You own a car that is sitting idle while you are working from home.

You leased the car through entity A.

You receive less than $20 per day when the car is rented.

You withdrew funds from your home loan to cover the running expenses of the car.

You incur interest expenses in relation to the car loan.

You also incur costs for registration, services, insurance, toll charges and cleaning.

You do not currently use the car yourself. When you need a car you use your spouse's car.

Entity A organises the rentals for you. You let them know when the car is available for rent. You do not know the person currently renting your car.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Assessable income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from carrying on a business and income from property.

To determine whether your activities are assessable, we need to consider if you are carrying on a business.

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 outlines some factors that indicate whether or not a business of primary production is being carried on. These factors equally apply to other types of businesses. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained'

Where a person does not have a significant commercial purpose, they are generally not carrying on a business for taxation purposes.

Your activities do not have a significant commercial purpose. The size and scale of your activity is not large enough to be a commercially viable business. The income received will not cover the associated expenses incurred and there is no indication that a profit will be made. Although you are using another entity to help you with your car rental, the arrangement is not considered to be business-like.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes.

Although rent from an investment property is generally regarded as ordinary assessable income, the payments you receive from renting your car are not considered to be ordinary income. A car is not regarded as an appreciating asset like an investment property.

The payments received will help you to cover the car expenses incurred while you are not using your car. The arrangement can not be seen as a profitable undertaking. It is considered that any income received in relation to your car rental is not regarded as assessable income.

Allowable deductions

Section 8-1 of the 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, or relate to the earning of exempt income.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

§ it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478, 

§ there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47 (Ronpibon's case) , and

§ it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

Taxation Ruling TR 95/33 considers the deductibility and apportionment of losses and outgoings where expenses are incurred for dual purposes. TR 95/33 states that 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 motives and intentions when determining the deductibility of the expenditure.

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 it is concluded that the disproportion between the outgoing and the relevant income is essentially to be explained by reference to the independent pursuit of some other objective (for example, to derive exempt income or derive income for another entity 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 & Ors v. FC of T 91 ATC 4950; (1991) 22 ATR 613.

In this case, the amount of assessable income derived by you from renting your car is nil. Therefore the expenses do no relate to the production of assessable income. Furthermore the expenses are regarded as being private in nature.

You are not incurring many additional running costs in relation to your car that are directly related to the rental payments received. That is, the registration, insurance and services are costs that would be incurred regardless of its use.

As highlighted above, the renting of your car is not considered to produce assessable income. The payments received will merely help cover the costs of your car. It is not considered that the costs are incurred in gaining or producing assessable income. Therefore no deductions are allowed in relation to any car expenses.