Edited version of private advice

Authorisation Number: 1052216909441

Date of advice: 31 January 2024

Ruling

Subject: Motor vehicle deduction - depreciation

Question 1

Is your vehicle exempt from the car cost limit under section 40-230 of the Income Tax Assessment Act 1997 (ITAA 1997) for the purpose of claiming a deduction for depreciation?

Answer

Yes.

Question 2

Are you entitled to claim the cost of modifications incurred by Department of Veteran Affair (DVA) to your vehicle in the calculation of depreciation under section 40-25 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Period Ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You purchased a specified motor vehicle on a specific date. You provided the purchase price of the vehicle.

You required modifications to the vehicle to ensure it was wheelchair accessible.

You provided the total cost of modifications to ensure wheelchair accessibility. These costs were covered by a DVA.

The vehicle payload capacity is 970kg.

The vehicle seats 4 people (including the driver) before and after modifications.

The vehicle has remained with the manufacturer for modifications since its purchase. You provided the date you expect to receive the vehicle.

You provided details on the business activities that the vehicle will be used in and what percentage of time it will be used for a taxable purpose.

You provided the quoted expenses you will incur for personal modifications such as window tinting and a hard canopy lid. These modifications will be completed after the vehicle has been delivered.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-10

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 section 40-190

Income Tax Assessment Act 1997 section 40-230

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

The vehicle is considered as a car designed mainly for the purpose of carrying goods, therefore the car limit outlined in section 40-230 of the ITAA 1997 passengers does not apply.

Detailed Reasoning

A deduction for the decline in value of depreciating assets is available under Division 40 of the Income Tax Assessment Act (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 the ITAA. Under subsection 40-230(1) a taxpayer cannot claim more for the depreciation of their asset than the car limit defined in subsection 40-230(3) for a vehicle designed mainly to carry passengers.

Car is defined in section 995-1 of the 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.

Some cars are designed to carry both goods and passengers. The principal purpose of these vehicles depends on its load carrying capacity and whether it is designed to carry mainly passengers or goods. Clause 4.5.2 of theVehicle Standard(Australian Design Rules - Definitions and Vehicle Categories) 2005 (ADR) sets out 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'.'

The Commissioner accepts that the principal purpose of a dual or crew cab utility vehicle, with a load capacity of less than two tonnes, may be determined by applying the ADR.

Application to your Circumstances

In your circumstances, the vehicle has 4 seating position's including the driver's seat, meaning the passenger carrying capacity is 272kg (4 passenger positions x 68kg). The vehicle has a payload of 970kg. 50% of the payload is 485kg.

As the passenger weight of 272kg of the vehicle is less than 50% of the payload, your vehicle is deemed to have a principal purpose of carrying goods. Therefore, it will not be subject to the car limit that applies to a car mainly designed for carrying passengers under section 40-230 of the ITAA 1997.

Question 2

Summary

As the modifications were funded by DVA and you did not personally incur the expense, you are not entitled to use the cost of the DVA funded modifications in the calculation of depreciation for your vehicle.

Detailed reasoning

Section 8-1(1)(b) of ITAA 1997 allows you to deduct from your assessable income any loss or outgoing to the extent that is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Paragraph 8-1(2)(b) disallows a deduction for a loss or outing to the extent that it is a loss or outgoing of a private or domestic nature. You must apportion the expense to only claim the percentage used in carrying on your business.

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 the ITAA. To work out the decline in value of a depreciating asset you need to know its cost. Section 40-10 of the ITAA 1997 outlines that the cost of a depreciating asset includes both:

•         Expenses you incur to start holding the asset; and

•         Additional expenses that contribute to its present condition and location (eg. improvements)

The above is deemed the first element of cost and is worked out as at the time you begin to hold the asset. For the purposes of calculating the decline in value, you are considered to hold an asset when you start to hold it and first use (or have it installed ready for use) for a taxable purpose.

Section 40-190 of the ITAA 1997 outlines second element of cost. The second element of cost is worked out after you start to hold the depreciating asset. Section 40-190(2) states:

'The second element is:

(a)           The amount you are taken to have paid under section 40-185 for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since you started to hold the asset; and

(b)           Expenditure you incur that is reasonably attributable to a balancing adjustment event occurring for the asset.

Example 1:

Andrew adds a new tray and canopy to his Ute. The material and labour that go into the addition are economic benefits that Andrew received and that contribute to the Ute's present condition.

The payments he makes for those economic benefits are included in the second element of the Ute's cost.'

Application to your circumstances

You advised that the vehicle will be used a specified percentage of the time in your business activities for:

•         meeting clients and attending meetings and seminars,

•         general farm work; and

•         general work in another business activity you part own.

As you cannot claim a deduction for an expense to the extent it is incurred for a private or domestic purpose you will need to apportion based on the private and business use of the asset. You will be required to apply the specified taxable use percentage in your calculations for depreciation as per section 8-1(2)(b) of the ITAA 1997.

The vehicle is expected to be delivered in a specified month in the relevant income year. The date the vehicle is delivered and installed ready for use for a taxable purpose, will be the time you begin to hold the asset. Any expenses you incurred prior to this date will be your first element cost for the purposes of calculating depreciation.

You paid a specified price for the vehicle. There will be no extra cost for the delivery of the vehicle. Modification costs associated with ensuring the vehicle is wheelchair accessible were funded by DVA. You did not personally incur these expenses and therefore had no loss or outgoing related to these modifications. They are excluded from the first element cost.

You have been quoted for personal modifications such as window tinting and the addition of a hard canopy lid. The window tinting was quoted at a specified price, and the hard canopy lid was quoted at a specified price. These modifications will be completed after the vehicle has been delivered. Once these modifications are completed, the sum of these modifications will be the second element of cost as per 40-190(2) of ITAA 1997.

Conclusion

As you did not incur the expense for modifications to the vehicle to make it wheelchair accessible, the cost amount funded by the DVA cannot be used in the calculation of depreciation. The expense of the specified purchase price for the vehicle is what you incurred and is considered your first element cost. The sum of the costs for the further modifications you will incur after delivery are considered your second element of cost. The first element cost and second element of cost are the amounts to which you can calculate your decline in value for the vehicle as per section 40-25 of the ITAA 1997.