Edited version of private advice

Authorisation Number: 1052109024239

Date of advice: 9 August 2023

Ruling

Subject: Deduction - motor vehicle

Question

Are you entitled to a deduction for the purchase of a motor vehicle?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a motor vehicle during the ruling period.

You are in a partnership with another entity where you hold a specified interest in the partnership. Your income is dependent upon the income of the partnership.

The motor vehicle was not purchased in the name of the partnership and was not purchased on finance.

You purchased the motor vehicle to be provided to the sole director and employee for their private use. You advised of the estimated business usage of the motor vehicle based on the logbook for the previously owned cars by you.

The partnership

The partnership carries on a property development business, focused on residential properties.

The partnership has a turnover of less than $10 million.

The partnership will purchase a property, demolish existing houses, and build town houses on the land.

The partnership purchased a property which you sub-divided into Lot A and Lot B.

The partnership approached a property developer to draw up plans to build on Lot A however the cost estimate was well above budgeted amount therefore it was decided to delay the decision to build in the hope that costs would decrease.

The partnership decided to sell Lot B due to forecast showing interest rates raising which would result in downward pressure on property prices and free up capital for another project. The property settled during the ruling period.

The partnership listed Lot A as building costs are still high and you deemed the project to be too risky in the current economic environment.

The partnership has spent time and effort trying to secure development sites, this includes site inspections, local council planning department meetings and project feasibility assessments.

The partnership has been unsuccessful in securing another development site during the past 12 months due to increased competition for sites due to the lower property listings.

You provided the profit and loss statements of the partnership, showing a loss during the previous financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 Subdivision 328-C

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax Assessment Act 1997 section 995-1

Income Tax (Transitional Provisions) Bill 1997 Subdivision 40-BB

Income Tax (Transitional Provisions) Bill 1997 section 328-181

Reasons for decision

Depreciation

Division 40 of the ITAA 1997 contains provisions which allow the claiming of a deduction for the decline in value of depreciating assets, which are used in the production of assessable income.

Section 40-25 of the ITAA 1997 provides that an entity can deduct an amount equal to the decline in value for an income year of a depreciating asset that the entity held, to the extent that it is used for a taxable purpose. Furthermore, it defines a taxable purpose to be the purpose of producing assessable income.

The purchase of your motor vehicle is not considered to be incurred in gaining assessable income. That is, there is not enough nexus between your business activity of receiving investment income from your partnership and the ownership of the motor vehicle. Therefore, you are not entitled to claim a deduction for the cost of purchasing your motor vehicle under Division 40 of the ITAA 1997.

Temporary full expensing

The provisions relating to temporary full expensing are contained within Subdivision 40-BB of the ITTPA 1997.

The application of the temporary full expensing provisions in Subdivision 40-BB of the ITTPA 1997 requires a taxpayer to satisfy the definition of a "small business entity" in section 328-110 of the ITAA 1997 as modified by the relevant provisions in the ITTPA 1997. Section 40-155 of the ITTPA modifies the small business aggregated turnover threshold in Subdivision 328-C of the ITAA 1997 such that, for the purpose of temporary full expensing, the aggregated turnover threshold for eligibility becomes $5 billion.

Paragraph 328-110(1)(a) of the ITAA 1997 provides that you are a small business entity if you carry on a business in the current year. Whether the activities of an entity constitute the carrying on of a business is question of fact and must be answered with having regard to the indicia of carrying on a business as a whole. Some general indicia of carrying on a business are discussed in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11).

The following indicia discussed in TR 97/11, based on fact and degree, will be relevant to the consideration of whether a business is being carried on:

•                     whether the activity has a significant commercial purpose or character

•                     whether the taxpayer has more than just an intention to engage in business

•                     whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•                     whether there is regularity and repetition of the activity

•                     whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

•                     whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit, and

•                     the size, scale and permanency of the activity.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case.

We have considered the overall factors or indicators against TR 97/11 and the overall impression is that you are not carrying on a business as follows:

•                     Your activity lacks significant commercial purpose, in fact the income that you receive is primarily partnership distributions. It is considered that the income that you receive is a reward for your investment in the partnership.

•                     You do not have a business plan.

•                     The income you receive has no regularity; the partnership distributions as distributed on a yearly basis.

•                     Profitability is reliant on the activities that are conducted by the partnership, with limited activities currently being conducted under the partnership.

•                     The size and scale of your activity is low. You generated income from partnership distributions in relation to one property (subdivided into 2 properties).

•                     The level of your activities goes beyond the scope of a hobby or recreation.

As you are not considered to be running a business you are not a small business entity as per 328-110 of the ITAA 1997. As you are not a small business entity you do not meet the eligibility requirements under Subdivision 40-BB of the ITTPA 1997 to claim temporary full expensing for the purchase of your motor vehicle.

Application to your circumstances

Based on the information provided:

•                     The motor vehicle is not considered to be incurred in gaining your assessable income. That is, there is not enough nexus between your business activity of receiving investment income from your partnership and the ownership of the motor vehicle.

•                     You are not considered to be a small business entity, as your assessable income is passive income from investment activities and not business income.

Therefore, you are not entitled to claim a deduction for the motor vehicle under either Division 40 of the ITAA 1997 or Subdivision 40-BB of the ITTPA 1997.