Edited version of your written advice

Authorisation Number: 1012865568932

Date of advice: 11 September 2015

Ruling

Subject: LCT and vehicle modification

Question 1

Will your clients be exempted from paying luxury car tax (LCT) once their vehicles have been converted?

Answer

According to the Australian Design Rules, vehicles constructed for both the carriage of persons and the carriage of goods shall be considered to be primarily for the carriage of goods if the number of seating positions times 68kg is less than 50 percent of the difference between the 'Gross Vehicle Mass' and the 'Un-laden Mass'. LCT is not payable on such vehicles.

Relevant facts and circumstances

You are registered for GST.

You are a vehicle conversion company.

The vehicles before conversion are retailed for prices above the LCT threshold.

There will be an agreement in place between the dealer and the end consumer for the end consumer to buy a vehicle from the dealer at a price determined by the dealer.

Once converted the load carrying capacity of the vehicle will be 1100 Kg.

The converted vehicles carry a maximum of 5 passengers.

Relevant legislative provisions

A New Tax System (Luxury Car Tax) Act 1999 subsection 5-20(3) and

A New Tax System (Luxury Car Tax) Act 1999 section 27-1.

Reasons for decision

Question 1

Will your clients be exempted from paying luxury car tax (LCT) once their vehicles have been converted?

Summary

According to the Australian Design Rules, vehicles constructed for both the carriage of persons and the carriage of goods shall be considered to be primarily for the carriage of goods if the number of seating positions times 68kg is less than 50 percent of the difference between the 'Gross Vehicle Mass' and the 'Un-laden Mass'. LCT is not payable on such vehicles.

Detailed reasoning

Unless otherwise stipulated all legislative references are to the LCT Act.

In this case, the LCT value includes the price of all supplies in relation to the car that are made to the recipient or their associate before the end supply per 5-20(3)(a) or under an arrangement with an associate of the supplier per 5-20(3)(b). The end supply is made to the recipient, whom is the customer described in the diagram.

Only one of subparagraphs 5-20(3)(a) or 5-20(3)(b) need to be satisfied. SV does not meet the definition of 'associates' so we need only consider 5-20(3)(b) in the context of an arrangement made with the supplier of the car. It does not seem that the arrangement is made with the supplier as the facts show the vehicle modifications are paid for directly to SV. On the other hand, the vendor of the vehicle is selling the vehicle as modified.

Are the supplies made in relation to the car?

'All supplies in relation to the car' would potentially include the work done to convert the vehicle. This phrase has been considered in relation to motor vehicle service plans sold with luxury cars and concluded a that a "multi factor approach" is required to determine the application of the phrase.

Multi-factor approach to determining 'in relation to'

19. Justice Hill in HP Mercantile made reference to subsection 11-15(5) of the GST Act to determine that paragraph 11-15(2)(a) contemplates an indirect link. This follows his reasoning that the 'sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history..'. Accordingly in interpreting subsection 5-20(3) of the LCT Act, regard may be the whole of section 5-20 to determine the scope of the term 'relates to'.

20. In considering the phrase 'in relation to' in GSTR 2003/8 Goods and services tax: supply of rights for use outside Australia - subsection 38-190(1), item 4, paragraph (a) and subsection 38-190(2), the Commissioner considered the context in which the term appeared and had regard to the broad policy. It was also observed by the Commissioner that the phrase 'in relation to' in Item 4 of section 38-190 of the GST Act had a narrower meaning than the same phrase as it appears in section 11-15.

21. The Explanatory Memorandum, when considering subsection 5-20(3) of the LCT Act, noted that '[t]his feature is designed to prevent additional supplies and/or modifications being made to a car after the point of sale and excluded from luxury car tax.' That is the intent of the provision is:

• Capture additions that are made prior to delivery of the car and avoid the Sales Tax arguments as to whether such supplies come within the ordinary meaning of price.

• Capture the same additions if they are deferred under an arrangement until after the supply of the car.

22. Subsection 5-20(3) of the LCT Act can therefore be said to act as an anti-avoidance provision. Accordingly, the provision should perhaps be broad enough to address artificial arrangements designed to avoid supplies falling within the LCT value. On this basis, a multifactor approach may need to be adopted in considering the term 'in relation to' having regard to the facts of each case. Whilst no single factor is determinative the following factors may be relevant to determining if the supply is made in relation to the car:

• The supply results in some physical change, modification or alteration to the car

• The supply is an addition that can be viewed as adding value to the physical car

• The supply is capable of being made before the delivery of the car

• Whether the price of the additional supply reflects its market value, or is influenced by the arrangement or agreement about the sale price of the car.

It would appear that the work done by you will result in physical change of the vehicle, which will add value, and will be made before the delivery of the car.

Under subsection 25-1(2), the meaning of luxury car excludes vehicles that are a commercial vehicle that is not designed for the principal purpose of carrying passengers. If it is not a luxury car as defined, it cannot be a taxable supply of a luxury car.

Commercial vehicle

The term 'commercial vehicle' is not defined in the LCT Act and therefore, the ordinary meaning of the words applies. The Macquarie Dictionary (Australia) gives the following meaning to the term 'commercial vehicle': a vehicle able to carry goods or passengers, and designated for use by businesses, as a panel van, utility, etc.'

In this instance what needs to be established is whether the vehicles described above in the facts are designed for the principal purpose of carrying goods for business or trade.

Dual purpose

Some vehicles with a load carrying capacity of less than two tonnes can be designed to carry both passengers and goods. These vehicles include: dual cab vehicles; crew cab vehicles; and utility vehicles.

These vehicles are referred to as dual purpose vehicles. The principal purpose of such a vehicle depends on the load carrying capacity of the vehicle and whether it is designed to carry mainly passengers or goods.

The Vehicle Standard (Australian Design Rule - Definitions and Vehicle Categories) 2005, ( ADR ) (The Australian Design Rules) states that:

A vehicle constructed for both the carriage of persons and the carriage of goods shall be considered to be primarily for the carriage of goods if the number of seating positions times 68kg is less than 50 percent of the difference between the 'Gross Vehicle Mass' and the 'Un-laden Mass'.

Thus, the process to determine whether any of the dual purpose vehicles supplied constitutes a luxury car is as follows:

• determine whether the LCT value of the vehicle exceeds the LCT threshold. If so;

• calculate the difference between the gross vehicle mass and the un-laden mass of the vehicle in kilograms and then calculate 50% of that difference;

• calculate the total passenger weight by multiplying the total seating capacity including the driver by 68kg;

• determine whether the total passenger weight exceeds 50% of the difference between the gross vehicle mass and the un-laden mass;

• if so, the principal purpose of the vehicle is to carry passengers and it is a luxury car within the meaning of section 25-1; and

• If not, the principal purpose of the vehicle is for the carriage of goods and it is not a luxury car within the meaning of section 25-1.

From the information provided, in relation to the gross vehicle mass, un-laden mass and the seating capacity including the driver, we can conclude that, at the time the contract of sale will be entered into, (which is after conversion) the majority of the designed load carrying capacity of the vehicles described in this ruling will not be attributable to their passenger carrying capacity.

If the majority of the designed load carrying capacity of the described vehicles will not be attributable to their passenger carrying capacity; the vehicles would not be designed for the purpose of carrying passengers. As such the vehicles would be excluded from being luxury cars by virtue of paragraph 25-1(2)(c).