Edited version of private advice

Authorisation Number: 1051606383807

Date of advice: 14 November 2019

Ruling

Subject: Income tax, Fringe benefits tax and Goods and services tax implications of purchasing or leasing a company vehicle

Income tax

Question 1

Is the taxpayer allowed a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for 100% of the following expenditure relating to the vehicle:

(a)   Interest on any loan taken out to fund the purchase of the vehicle if the taxpayer buys the vehicle?

(b)   Lease payments on any lease of the vehicle if the taxpayer leases the vehicle?

(c)   Running and operating costs such as fuel, oil, servicing, maintenance, insurance and registration?

(d)   The cost of advertising placed on the vehicle advertising the taxpayer's business such as car wraps, stencilled words, logos, and business contact details?

Answer

Yes

Question 2

Is the taxpayer allowed a deduction under section 25-10 of the ITAA 1997 for 100% of the cost of repairs made to the vehicle?

Answer

Yes

Question 3

If the taxpayer buys the vehicle, is the taxpayer allowed a deduction for 100% of the decline in value of the vehicle as calculated under the provisions of Subdivision 328-D of the ITAA 1997?

Answer

Yes

Question 4

Will the provision of the vehicle to the employee director of the taxpayer give rise to a deemed dividend pursuant to the provisions of Division 7A of the ITAA 1936, specifically the combination of section 109C and section 109CA?

Answer

No

Fringe benefits tax

Question 5

Is the vehicle a vehicle that qualifies for the work-related use exemption in subsection 47(6) Fringe Benefits Tax Assessment Act 1986 (FBTAA) because it is a vehicle designed to carry a load of one tonne or more?

Answer

Yes

Question 6

Will the provision of the vehicle to the employee director of the taxpayer for business use to perform their work/employment duties qualify as an exempt residual benefit under subsection 47(6) of the FBTAA provided there is no private use of the vehicle by the employee director other than:

(a)   "Work-related travel" of the employee director (as defined in subsection 136(1) of the FBTAA); and

(b)   Other private use of the vehicle by the employee director (or an associate thereof), being other use that is minor, infrequent and irregular as set out in Practical Compliance Guideline (PCG) 2018/3?

Answer

Yes

Goods and services tax

Question 7

Is the taxpayer entitled to claim an input tax credit pursuant to section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) in respect of Goods and services tax (GST) included in the price of:

(a)   The vehicle if the taxpayer buys the vehicle?

(b)   Lease payments on any lease of the vehicle if the taxpayer leases the vehicle?

(c)   Running and operating costs such as fuel, oil, servicing, repairs and maintenance, insurance and registration?

(d)   Advertising placed on the vehicle advertising the taxpayer's business such as car wraps, stencilled words, logos, and business contact details?

Answer

Yes

This ruling applies for the following periods:

Income tax years ending 30 June 20XX to 30 June 20YY

Fringe benefits tax years ending 31 March 20XX to 31 March 20YY

The scheme commences on:

1 April 20ZZ

Relevant facts and circumstances

The taxpayer provides professional services for reward.

The taxpayer is registered for GST.

The taxpayer is a small business entity as defined in section 328-110 of the ITAA 1997.

The taxpayer is owned by a company as trustee for a Trust.

The employee director is:

·        A director and shareholder of the trustee company

·        A beneficiary of the Trust

·        The taxpayer's sole director under the Corporations Act 2001

·        Employed by the taxpayer pursuant to a contract of employment

The taxpayer intends to purchase (using commercial finance) or lease a vehicle for the purpose of providing it to the employee director to use for business purposes. The vehicle will be used to perform work duties such as work travel:

·        To and from work related meetings

·        To and from seminars and workshops hosted by the taxpayer at outside venues for members of the public

·        To and from CPD events at outside venues

·        To and from the airport when the employee director is required to fly for work purposes.

Once the vehicle is purchased or leased, the taxpayer intends to install advertising on the vehicle such as car wraps, stencilled words, logos and contact details, advertising the taxpayer's business. While the vehicle is in transit, such advertising will act as a mobile billboard or advertising medium to advertise the taxpayer's business to the public at large.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 109C

Income Tax Assessment Act 1936 section 109CA

Income Tax Assessment Act 1936 subsection 109ZB(3)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-10

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 subdivision 328-D

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

Fringe Benefis Tax Assessment Act 1986 subsection 47(6)

Fringe Benefis Tax Assessment Act 1986 subsection 136(1)

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

Reasons for decision

Question 1

Summary

The taxpayer is allowed a deduction for 100% of the expenses outlined in (a) to (d) in the question.

Detailed reasoning

Interest expenses, lease payments, running and operating costs such as fuel, oil, servicing, maintenance, insurance, registration and advertising costs are addressed under the general deductibility provision, section 8-1 of the ITAA 1997.

Section 8-1 of the ITAA 1997 allows a deduction for all losses or 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.

In this case, the employee director will use the vehicle to attend work related meetings, seminars and workshops hosted by the taxpayer, CPD events and the airport for work trips.

Attending these meetings, seminars, workshops, CPD events and the airport for work trips will lead to the production of the taxpayer's assessable income. Therefore the taxpayer is allowed a deduction for 100% of the expenses outlined in (a), (b), (c) and (d).

Any private use of the vehicle may be subject to Fringe Benefits Tax. This is discussed below in Question 6.

Question 2

Summary

The taxpayer is allowed a deduction for 100% of the cost of repairs made to the vehicle.

Detailed reasoning

The cost of repairs is addressed under a specific deductibility provision, section 25-10 of the ITAA 1997. Section 25-10 allows a deduction for the cost of repairs made to a depreciating asset that you hold or use for the purpose of producing assessable income. The vehicle will be regarded as a depreciating asset as defined by section 40-30 of the ITAA 1997.

In this case, the employee director will use the vehicle to attend work related meetings, seminars and workshops hosted by the taxpayer, CPD events and the airport for work trips.

Attending these meetings, seminars, workshops, CPD events and the airport for work trips will lead to the production of the taxpayer's assessable income. Therefore the taxpayer is allowed a deduction for 100% of the expenses outlined in (a), (b), (c) and (d).

Any private use of the vehicle may be subject to Fringe Benefits Tax. This is discussed below in Question 6.

Question 3

Summary

The taxpayer is allowed a deduction for 100% of the decline in value of the vehicle under the provisions of Subdivision 328-D of the ITAA 1997.

Detailed reasoning

Division 328 of the ITAA 1997 contains special rules that apply to small business entities. Subdivision 328-D provides a simplified regime for calculating decline in value deductions on depreciating assets.

The taxpayer is a small business entity as defined by section 328-110 of the ITAA 1997.

As stated above, the vehicle will be regarded as a depreciating asset as defined by section 40-30 of the ITAA 1997 and will be used by the taxpayer for the purpose of producing assessable income.

The taxpayer is therefore allowed a deduction for 100% of the decline in value of the vehicle calculated under the provisions of subdivision 328-D of the ITAA 1997.

Any private use of the vehicle may be subject to Fringe Benefits Tax. This is discussed below in Question 6.

Question 4

Summary

The provision of the vehicle to the employee director will not give rise to a deemed dividend pursuant to the provisions of Division 7A of the ITAA 1936.

Detailed reasoning

Subsection 109C(1) of the ITAA 1936 states that a private company is taken to pay a dividend to an entity if the private company makes a payment to the entity and the payment is made when the entity is a shareholder in the private company or an associate of such a shareholder.

The employee director is an associate of a shareholder in the private company.

Subsection 109CA(1) provides that a payment to an entity includes the provision of an asset for use by the entity. The provision of the vehicle to the employee director will constitute a payment.

However, Division 7A does not apply to a payment made to a shareholder, or an associate of a shareholder, in their capacity as an employee (as defined in the FBTAA) or an associate of such an employee, by virtue of subsection 109ZB(3) of the ITAA 1936.

The provision of the vehicle to the director in their capacity as an employee will therefore not give rise to a deemed dividend pursuant to the provisions of Division 7A of the ITAA 1936.

Fringe Benefits Tax

Question 5

Summary

The vehicle is a vehicle that qualifies for the work-related use exemption in subsection 47(6) of the FBTAA because it is a vehicle designed to carry a load of one tonne or more.

Detailed reasoning

The definition of 'car' in subsection 136(1) of the FBTAA provides that the term has the meaning given by subsection 995-1(1) of the ITAA 1997.

Subsection 995-1(1) of the ITAA 1997 defines 'car' to mean:

a motor vehicle (except a motor cycle or similar vehicle) designed to carry a load of less than 1 tonne and fewer than 9 passengers

The designed load capacity of a vehicle is discussed in Miscellaneous Taxation Ruling No. MT 2024 Fringe benefits tax: Dual cab vehicles eligibility for exemption (MT 2024) in paragraph 11:

...the designed load capacity of a motor vehicle is to be taken as the gross vehicle weight as specified on the compliance plate by the manufacturer (broadly, the maximum all-up loaded weight), reduced by the basic kerb weight of the vehicle.

The gross vehicle weight or mass of the vehicle is 3,200 kilograms.

The basic kerb weight of the vehicle is 2,100 kilograms.

The designed load capacity, or payload, is therefore 1,100 kilograms.

The vehicle is designed to carry a load of more than one tonne, and therefore does not satisfy the definition of a 'car'.

The vehicle is therefore a vehicle other than a car. Subject to satisfying other conditions, the vehicle is a vehicle that qualifies for the work-related use exemption in subsection 47(6) of the FBTAA.

Question 6

Summary

The provision of the vehicle to the employee director of the taxpayer for business use to perform their work/employment duties will qualify as an exempt residual benefit under subsection 47(6) of the FBTAA provided the private use is limited to that outlined in PCG 2018/3.

Detailed reasoning

The vehicle is not a car, and is therefore a vehicle other than a car.

Exempt benefits for a vehicle other than a car are addressed in subsection 47(6) of the FBTAA as follows.

Where:

(a) a residual benefit consisting of the provision or use of a motor vehicle is provided in a year of tax in respect of the employment of a current employee:

(aa) the motor vehicle is not:

(i) a taxi let on hire to the provider; or

(ii) a car, not being:

(A) a panel van or utility truck; or

(B) any other road vehicle designed to carry a load of less than 1 tonne (other than a vehicle designed for the principal purpose of carrying passengers); and

(b) there was no private use of the car during the year of tax and at a time when the benefit was provided other than:

(i) work-related travel of the employee; and

(ii) other private use by the employee or an associate of the employee, being other use that was minor, infrequent and irregular.

the benefit is an exempt benefit in relation to the year of tax.

'Work-related travel' is defined in subsection 136(1) of the FBTAA to mean:

(a) travel by the employee between:

(i) the place of residence of the employee; and

(ii) the place of employment of the employee or any other place from which or at which the employee performs duties of his or her employment; or

(b) travel by the employee that is incidental to travel in the course of performing the duties of his or her employment.

The private use of a motor vehicle is exempt from fringe benefits tax if all of the following conditions are satisfied:

·        the vehicle is a panel van, utility or other commercial vehicle (that is, one not designed principally to carry passengers)

·        the employee's private use of such a vehicle is limited to

·        travel between home and work

·        travel that is incidental to travel in the course of duties of employment

·        non-work related use that is minor, infrequent and irregular.

Residual benefit

The benefit is the provision of a motor vehicle other than a car. The benefit is a residual benefit. Paragraph 47(6)(a) is satisfied.

Type of vehicle

The vehicle is a utility truck. Paragraph 47(6)(aa)(ii)(A) is satisfied.

Use of vehicle

In accordance with PCG 2018/3 Exempt car benefits and exempt residual benefits: compliance approach to determining private use of vehicles (PCG 2018/3), paragraph 6(e), the taxpayer will implement a policy that limits private use of the vehicle and will obtain an assurance from the employee director that their private use of the vehicle is limited to use as outlined in paragraphs 6(f) and (g) of PCG 2018/3, namely:

(f) your employee uses the vehicle to travel between their home and their place of work and any diversion adds no more than two kilometres to the ordinary length of that trip, and

(g) for journeys undertaken for a wholly private purpose (other than travel between home and place of work), the employee does not use the vehicle to travel

(i) more than 1,000 kilometres in total, and

(ii) a return journey that exceeds 200 kilometres.

Provided that the employee director limits private use to that outlined in PCG 2018/3, the provision of the vehicle to the employee director of the taxpayer for business use to perform their work/employment duties will qualify as an exempt residual benefit under subsection 47(6) of the FBTAA.

Goods and Services Tax

Question 7

Summary

The taxpayer can claim an input tax credit in relation to the acquisitions outlined in (a) to (d) in the question to the extent that these acquisitions are made for a creditable purpose.

Detailed reasoning

Section 11-20 of the GST Act provides that you are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

(a) you acquire anything solely or partly for a creditable purpose; and

(b) the supply of the thing to you is a taxable supply; and

(c) you provide, or are liable to provide consideration for the supply; and

(d) you are registered or required to be registered for GST.

All the requirements of section 11-5 of the GST Act must be satisfied for you to be entitled to input tax credits under section 11-20 of the GST Act.

Under subsection 11-5(1) of the GST Act you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on an enterprise.

However, under subsection 11-15(2) of the GST Act, you do not acquire the thing for a creditable purpose to the extent that:

·        the acquisition relates to making supplies that would be input taxed (for example financial supplies and supplies of residential premises); or

·        the acquisition is of a private or domestic in nature.

In the present case, the taxpayer intends to acquire the vehicle for the purpose of providing it to the employee director to use the vehicle for business use to perform their work duties. Therefore it is considered the acquisition of the vehicle is for a creditable purpose to the extent it is not for a private use (the input taxed element is not applicable here).

The taxpayer is required to determine the extent to which the acquisition is for a creditable purpose, based on the taxpayer's intended use of the acquisition.

If the taxpayer determines the extent of creditable purpose based on intended use, the taxpayer may be required to make adjustments if its actual use of the thing differs to its intended use.

Similarly, if the taxpayer acquires the vehicle solely for a creditable purpose and later applies it solely to private or domestic use, the taxpayer may have to make an increasing adjustment.

Please note that you have to hold a tax invoice to claim input tax credits for your acquisitions. The tax invoice should show you the correct GST amounts that are included in the prices you paid because the things supplied to you can be partly taxable and partly GST-free. For example, registration is generally only taxable on the Compulsory Third Party insurance component.