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Edited version of your written advice
Authorisation Number: 1012697369838
Ruling
Subject: Compensation for car
Question
Are you entitled to a deduction for the amount that you paid to your friend for damaging their car?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2014
The scheme commenced on
1 July 20XX
Relevant facts
You borrowed your friend's car to use to visit client's premises.
On the way to visit a client, you were involved in an accident in which the car was written off.
The car was uninsured.
You researched to find out the value of the particular car and made a payment to your friend.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 28-12
Income Tax Assessment Act 1997 Section 40-285
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, or relate to the earning of exempt income.
Section 28-12 of the ITAA 1997 provides that a deduction for car expenses can be made using one of 4 methods if the taxpayer owned or leased a car or hired a car under a hire purchase agreement.
Subdivision 40-D (sections 40-280 to 40-370) of the ITAA 1997 relates to balancing adjustments for depreciating assets.
Section 40-285 of the ITAA 1997 provides that if:
• a balancing adjustment event occurs for a depreciating asset held by a taxpayer; and
• the taxpayer worked out the asset's decline in value under subdivision 40-B; and
• the asset's termination value is less than its adjustable value just before the event occurred;
the taxpayer can deduct the difference between those amounts in the income year in which the event occurred.
In your case, you did not own or lease the car or hire it under a hire purchase agreement. Therefore, you are not entitled to any claim under either section 28-12 or section 40-285 of the ITAA 1997. The car was written off and therefore the amount cannot be considered to be for repairs.
A car is considered to be capital. While we accept that you may have been undertaking work related travel when the accident happened, the amount you paid to your friend is considered to be a capital payment. Therefore, you are not entitled to a deduction for the amount you paid to your friend for their car.