Edited version of private advice

Authorisation Number: 1052242431110

Date of advice: 16 April 2024

Ruling

Subject: Deductions - depreciation - vehicle modifications

Question 1

Will the trust's vehicle and its modifications be taken to be a single asset, rather than as separate assets under subsection 40-30(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will the trust's vehicle qualify for the exemption available under subsection 8(2) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA)?

Answer

Yes.

Question 3

Will the trust be entitled to apply the temporary full expensing (TFE) measures under Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) to deduct in full the cost of the vehicle as a depreciating asset for the 2023 income year?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

The trust acquired a dual cab motor vehicle (the vehicle) in the 20XX income year.

The vehicle is used by the trust in the course of carrying on a business for carrying and transporting necessary tools and equipment.

At the same time of its acquisition, the vehicle underwent various accessory modifications, resulting in the overall cost of the vehicle being above the car limit.

The vehicle specifications were provided. The vehicle has a seating capacity of 5 passengers.

The vehicle has a load capacity of 795 kilograms.

The trust had an aggregated turnover of less than $XX million in the 20XX and 20XX income years.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 40-C

Income Tax Assessment Act 1997 subsection 40-30(4)

Income Tax Assessment Act 1997 subsection 40-230(1)

Income Tax Assessment Act 1997 subsection 328-110(1)

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

Income Tax (Transitional Provisions) Act 1997 section 40-155

Fringe Benefits Tax Assessment Act 1986 subsection 8(2)

Reasons for decision

Question 1

Composite items

A 'composite item' is an item that is made up of a number of components that are each capable of separate existence. Subsection 40-30(4) of the ITAA 1997 provides that whether a particular composite item is itself a depreciating asset or whether its components are separate depreciating assets is a question of fact and degree which can only be determined in the light of all the circumstances of the particular case.

The Commissioner's view on determining whether a composite item is itself a depreciating asset or whether its components are separate depreciating assets is set out in Taxation Ruling TR 2024/1 Income tax: composite items - identifying the relevant depreciating asset for capital allowances.

Paragraph 9 of TR 2024/1 states that the purpose or 'functionality' is generally a useful guide to the identification of an item. The main principles that are taken into account in determining whether a composite item is a single depreciating asset, or more than one depreciating asset, are:

•         The depreciating asset will ordinarily be an item that performs a separate identifiable function, having regard to the purpose it serves in its business context.

•         An item may be identified as having a discrete function, and therefore as a depreciating asset, without necessarily being self-contained or used on a standalone basis.

•         The greater the degree of physical or functional integration of an item with other component parts, the more likely the depreciating asset will be the composite item.

•         When the effect of attaching an item to another item (which itself has its own independent function) varies the function or operational performance of that other item, the attachment is more likely to be a separate depreciating asset.

•         When various components are purchased (whether via one or multiple transactions) to function together as a system and are necessarily connected in their operation, the depreciating asset is usually the system (the composite item).

Application to your circumstances

In this case, the trust acquired a dual cab vehicle in the 20XX income year which, at the same time it was acquired, had various accessory modifications that increased its overall cost.

In regards as to whether these modifications are separate depreciating assets, it is likely that these modifications would have little purpose or functionality without first being installed on the vehicle. Furthermore, it can also be determined that these modifications were purchased in a single transaction to function together in their operation as a motor vehicle. Therefore, the vehicle will be taken to be a composite asset under subsection 40-30(4) of the ITAA 1997 and thus, the modifications will not be separate depreciating assets.

Question 2

Exempt car benefit

Subsection 8(2) of the FBTAA provides that a car will be exempt from fringe benefits tax if:

a.    the car is a taxi, panel van or utility vehicle designed to carry a load of less than one tonne, or another road vehicle not designed for the principal purpose of carrying passengers; and

b.    there was no private use of the car during the year when the benefit was provided, except:

                             i.        work-related travel of the employee; and

                            ii.        minor, infrequent and irregular private use by the employee or an associate of the employee.

Therefore, in determining whether a car is of a type to which the work-related exemption could apply, the principal purpose of the design of the car is relevant.

Miscellaneous Taxation Ruling MT 2024: Fringe benefits tax: dual cab vehicles eligibility for exemption where private use is limited to certain work-related travel differentiates between utility trucks and dual cabs. As stated in paragraph 14, a dual cab vehicle with a load carrying capacity of less than one tonne that is not designed principally for carrying passengers may qualify for the work-related use exemption.

In determining whether a dual cab vehicle is designed principally for carrying passengers, MT 2024 refers to the approach considered in clause 4.5.2 of the Vehicle Standard (Australian Design Rules - Definitions and Vehicle Categories) 2005 (ADR).

According to the ADR, 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 68 kilograms is less than 50 percent of the difference between the 'Gross Vehicle Mass' and the 'Unladen Mass'.

Therefore, if the total passenger weight exceeds the remaining 'load' capacity, the vehicle is to be treated as being designed for the principal purpose of carrying passengers and as such ineligible for work-related use exemption. Where the load capacity exceeds the total passenger weight, eligibility for the work-related use exemption arises.

Application to your circumstances

In this case, the trust acquired a dual cab vehicle where its sole use was for work-related travel in carrying and transporting equipment and tools for the trust's business.

The vehicle specifications were provided. As the designed passenger carrying capacity is less than 50% of the load capacity, under the ADR, the vehicle will be taken to not be designed for the principal purpose of carrying passengers.

Therefore, since the vehicle is not designed for the principal purpose of carrying passengers, and the vehicle has only been used for work-related travel, the vehicle will be exempt from fringe benefits tax.

Question 3

Temporary Full Expensing

Temporary full expensing (TFE) allows for the immediate write-off of the cost of depreciating assets and relevant additional expenditure under Subdivision 40-BB of IT(TP)A.

Section 40-155 of the IT(TP)A requires an entity accessing TFE to be a 'small business entity'.

Subsection 328-110(1) of the ITAA 1997 states:

You are a small business entity for an income year (the current year) if:

a.    you carry on a business in the current year; and

b.    one or both of the following applies:

                             i.        you carried on a business in the previous income year and your aggregated turnover for the previous year was less than $10 million;

                            ii.        your aggregated turnover for the current year is likely to be less than $10 million.

Furthermore, to be eligible for TFE, the depreciating asset must be:

•         New or second-hand (if it is a second-hand asset, your aggregated turnover is below $50 million);

•         First held by you at or after 7.30pm AEDT on 6 October 2020; and

•         First used or installed ready for use by you for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2023.

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 that is designed mainly for carrying passengers 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 20XX income year is $X.

However, the car limit will not be applied to a car that is not designed mainly for carrying passengers. The Commissioner has accepted that the approach outlined under clause 4.5.2 of the ADR can be applied to determine if a vehicle is designed mainly for carrying passengers.

As outlined above under question 1, the ADR states that a vehicle shall be taken to be designed primarily for the carriage of goods if the number of seating positions times 68 kilograms is less than 50 percent of the difference between the 'Gross Vehicle Mass' and the 'Unladen Mass'.

Application to your circumstances

In this case, the trust acquired a dual cab vehicle in the 20XX income year, where its sole use was for work-related travel in carrying and transporting equipment and tools for the trust's business. As the trust had an aggregated turnover of less than $XX million in the 20XX and 20XX income years, it will be taken to be a small business entity.

In regard to the car limit, as outlined under question 1, the vehicle will be taken to be designed primarily for the carriage of goods under the ADR. Therefore, as the vehicle is not designed mainly for carrying passengers, the car limit will not be applied. Thus, the trust will be entitled to apply TFE to deduct in full the cost of the vehicle as a depreciating asset for the 20XX income year.