ATO Interpretative Decision

ATO ID 2002/933

Income Tax

Termination value of a car - car limit & GST
FOI status: may be released

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

If the balancing adjustment event for a car to which the car limit under section 40-230 of the Income Tax Assessment Act 1997 (ITAA 1997) applied is a taxable supply, is the adjustment, under section 40-325 of the ITAA 1997, made after the termination value is first reduced by the amount of the GST payable on the supply?

Decision

Yes. If the balancing adjustment event for a car to which the car limit under section 40-230 of the ITAA 1997 applied is a taxable supply, the adjustment under section 40-325 of the ITAA 1997 is made after the termination value is first reduced by the amount of the GST payable on the supply under subsection 27-95(1) of the ITAA 1997.

Facts

A taxpayer registered for GST acquired a car on 1 July 2001. The cost of the car was $79,500. The car was used solely for a creditable purpose and the maximum input tax credit of $5,012 was claimed. The car limit applied to reduce the first element of cost of the car to the amount of $55,134. The car was later sold for $38,000 including GST.

Reasons for Decision

Generally the termination value of a depreciating asset is the amount you receive for the asset on its disposal. The termination value of a depreciating asset is reduced under subsection 27-95(1) of the ITAA 1997 if the balancing adjustment event is a taxable supply. The reduction is the amount of the GST payable on the supply.

The termination value of a car to which the car limit applied is further adjusted by section 40-325 of the ITAA 1997. This section applies a fraction to the termination value worked out after the reduction by subsection 27-95(1) of the ITAA 1997. The fraction is:

Car limit + Amounts included in the second element of the car's cost / Total cost of the car (ignoring the car limit)

This adjustment recognises that the car limit has reduced the cost of the car otherwise available to work out the decline in value and reduces the car's termination value to an amount proportional to the amount used to work out the car's decline in value.

In working out the fraction used to adjust the termination value, the total cost of the car (ignoring the car limit) is the cost after applying Subdivision 27-B of the ITAA 1997. As the cost of a car is reduced by the amount of input tax credit to which an entity is entitled before the car limit applies, this amount is also excluded from the total cost of the car when working out the fraction under section 40-325 of the ITAA 1997.

The taxpayer is registered for GST and purchased a car for $79,500 on 1 July 2001. The car was used solely for a creditable purpose.

The first element of cost ($79,500) is reduced by the maximum input tax credit ($5,012) to $74,488. The first element of cost is further reduced to the car limit of $55,134.

The car was sold on 30 June 2002 for $38,000 including GST. No amounts were included in the second element of the car's cost.

The car's termination value is worked out as follows:

Reduction for GST under subsection 27-95(1) of the ITAA 1997

Termination value	$38,000
less GST payable	$ 3,455
=	$34,545

Reduction under section 40-325 of the ITAA 1997

$34,545 x	$55,134
	$74,488
=	$25,569

The car's termination value is $25,569.

Amendment History

Date of amendment	Part	Comment
6 June 2014	Related ATO Interpretative Decisions	Removed as it is no longer current.
	Related rulings / determinations	Inserted reference to TD 2006/40 as it replaces ATO ID 2002/693.

Date of decision: 18 September 2002

Year of income: Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   subsection 27-95(1)
   section 40-230
   section 40-325

Related Public Rulings (including Determinations)
TD 2006/40

Keywords
Goods and services tax
Termination value
Car limit

Siebel/TDMS Reference Number: DW329182; 1-AE454FM

Business Line: Private Groups and High Wealth Individuals

Date of publication: 30 September 2002
Date reviewed: 14 December 2016

ISSN: 1445-2782

history

	Date:	Version:
	18 September 2002	Original statement
You are here	6 June 2014	Updated statement

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