Edited version of private advice

Authorisation Number: 1051970147444

Date of advice: 14 April 2022

Ruling

Subject: Car limit

Question 1

Are you entitled to claim the entire purchase price of a luxury vehicle under the temporary full expensing measures?

Answer

No.

Question 2

Will the car limit stated in section 40-230 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to limit the first element of cost?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On XX Jxxx 20XX, IM (you) commenced your business of xxx as a sole trader.

On XX Axxx 20XX, you purchased a 20XX ABC DE (DE) for $XXX,XXX.

The DE has a seating capacity of 2 passengers.

On XX Xxxx 20XX, you purchased a 20XX FGH IJ (IJ) for $XX,XXX.

The IJ has a seating capacity of 4 passengers.

Neither the DE nor IJ have been fitted with modifications for transporting disabled persons.

Both the DE and IJ are stored in professional business storage places.

Both the DE and IJ are used XXX% in your business and there is no personal use of either vehicle. You record this using the logbook method.

On XX Axxx 20XX, you entered an agreement with KLMN (KLMN) as your management partner to market your vehicle for rent. All bookings, client liaison and payments are conducted through KLMN.

If KLMN obtains the customer from their marketing strategies, they share a larger portion of profit.

On X Xxx 20XX, you obtained your first booking for the vehicles. Since the first booking you have had approximately XX bookings. Most of your bookings are for multiple days.

You have a database of clients and prospects of over XXX people.

You are a small business entity with a turnover of less than $50 million.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Subdivision 40-C

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-185

Income Tax Assessment Act 1997 section 40-190

Income Tax Assessment Act 1997 section 40-225

Income Tax Assessment Act 1997 section 40-230

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Car is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a motor vehicle (except a motorcycle or similar vehicle) that is designed to carry a load of less than 1 tonne and fewer than 9 passengers. Motor vehicle is also defined in section 995-1 of the ITAA 1997 as any motor powered road vehicle (including a 4 wheel drive vehicle).

Car limit

The cost of a depreciating asset has two elements. The first element of the cost is worked out under Subdivision 40-C of the ITAA 1997 as at the time you start to hold the asset and includes amounts you have taken to have paid to hold the asset, such as the acquisition price.

Subsection 40-230(1) of the ITAA 1997 states that the first element of the cost of a motor vehicle will be reduced to the car limit for the financial year in which you started to hold it if its cost exceeds that limit. The car limit for the 2020-21 financial year is $59,136. The car limit can be applied to each car.

Exceptions

Subsection 40-230(2) of the ITAA 1997 provides that the car limit does not apply to a car when:

•                    fitted out for transporting disabled people in wheelchairs for profit (for example specially modified taxis); or

•                    whose first element of cost exceeds the car limit only because of modifications made to enable an individual with a disability to use the car for a taxable purpose.

Temporary Full Expensing

To be eligible for temporary full expensing for a second-hand asset your aggregated turnover must be below $50 million.

A deduction for the decline in value of depreciating assets is available under Division 40 of the ITAA 1997. Specifically, a deduction is available for the decline in value of a depreciating asset that is held by you to produce assessable income under section 40-25 of ITAA 1997.

The decline in value of your depreciating assets is calculated on the basis of the cost of the asset to you. The cost of a depreciating asset held by you is comprised of two elements.

1.            The amount you are taken to have paid, and

2.            The amount you have paid for a capital improvement to the asset (i.e. the amount paid to bring the asset to its present condition and location).

As mentioned above, section 40-230 of the ITAA 1997 states the first element of the cost of a car is reduced to the car limit for the financial year in which you started to hold it if its cost exceeds that limit.

Application to your circumstances

The IJ and DE meets the definition of a car under section 995-1 of the ITAA 1997 and are both used XXX% for business purposes. The cars have not been modified for the transportation of disabled persons and therefore the exception to the application of the car limit will not apply.

There is no discretion available to the Commissioner in relation to the application of the car limit. As such the first element of the cost base for each vehicle will be reduced to the car limit of $XX,XXX for the 20XX-XX income year for the purposes of Division 40 of the ITAA 1997 and the application of the temporary full expensing measures.

Therefore, you must reduce the cost of the vehicle to the car limit before calculating your depreciation. You cannot claim the excess costs of the vehicle above the car limit under any other depreciation rules.