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Edited version of your written advice
Authorisation Number: 1013015992116
Date of advice: 13 May 2016
Ruling
Subject: Luxury Car Tax
Question 1
Does the supply of the vehicle repair membership program (repair membership) constitute an additional supply or modification under subsection 5-20(3) of the A New Tax System (Luxury Car Tax) Act 1999 (LCT Act)?
Answer
No.
Relevant facts and circumstances
The entity (You) is an Australian motor vehicle dealer and is registered for Goods and Services Tax (GST).
In addition to the sale of motor vehicles, you sell the repair membership to your customers as an aftersales product and is sold either at the time of the vehicle sale, or at a later time, such as when a car is brought in for servicing.
The repair membership is provided by the vehicle repair company, a separate and unrelated entity to you, which offers subscribers access to discounted cosmetic repairs for their vehicle during the period of their membership. Its membership is also transferable to other vehicles and is not limited or restricted to the supplied vehicle.
At the time of supplying the repair membership, there is no physical modification, treatment or accessory added to the vehicle. Depending on future circumstances, it is possible that no actual repairs may ever take place.
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
Subsection 5-20(3) of the LCT Act provides that in certain circumstances, additional supplies and modifications to cars are included in the LCT value, and states:
Additional supplies and modifications for cars
(3) The *luxury car tax value of a *car includes the price of all supplies in relation to the car that are made to, or are paid for by, the *recipient of the car, or an *associate of the recipient and that are:
(a) made before the *end supply of the car; or
(b) made under an arrangement made with the supplier of the car, or with an associate of the supplier, at or before the time of the end supply.
[Emphasis added.] (Items marked with an * are defined in the dictionary at section 27-1 of the LCT Act).
As the LCT Act does not elaborate on the phrase 'in relation to', guidance should be sought from case law and the Explanatory Memorandum to the A New Tax System (Luxury Car Tax) Act 1999.
According to the court in ASIC v Citrofresh International Ltd [2007] FCA 1873, 'the interpretation and scope of the expression "in relation to" is limited in its precedential value by the context in the relevant statue in which it appears'.
With regard to this, the context in which 'in relation to' appears in subsection 5-20(3) of the LCT Act requires a relationship between the supply and the car. This relationship can be inferred from paragraphs 2.55 to 2.57 of the Explanatory Memorandum which provides:
2.55 … This 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…
2.56 … if you supply a luxury car and you, or your associate, provide additional supplies and/or modifications to that car, or that are paid for by the recipient…
2.57 For example, if a person buys a car from a car dealer who arranges for modifications and/or additional supplies to be made or added to that car, then the luxury car tax value of the car must include the price of those modifications and/or additional supplies...
[Emphasis added.]
A direct and substantial connection is therefore required between 'the supply' and 'the car'.
Furthermore, the Explanatory Memorandum at paragraph 2.55 also indicates the anti-avoidance purpose of the provision as it infers the intention of the provision to:
• 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; and
• capture the same additions if they are deferred under an arrangement until after the supply of the car.
In determining the extent to which the relationship between the repair membership and the car has a direct and substantial connection, the facts indicate that the repair membership:
• does not result in some physical change, modification or alteration to the car;
• does not add value to the physical car as its purpose is to provide cosmetic repairs that bring the car back to its original condition in the event that the car is damaged;
• is capable of being supplied before the delivery of the car however the actual use of its services is contingent upon future circumstances where the car becomes in need of a cosmetic repair;
• is an aftersales product sold at its market value.
As such, the repair membership does not have a direct and substantial connection to the car.
The repair membership is therefore not considered a supply made in relation to the car for the purposes of subsection 5-20(3) of the LCT Act and does not form part of the luxury car tax value of a car.