Edited version of private advice

Authorisation Number: 1052065209736

Date of advice: 19 December 2022

Ruling

Subject: Temporary full expensing

Question

Are you entitled to claim the entire purchase price of a passenger vehicle used commercially under the temporary full expensing (TFE) measures of the Income Tax (transitional provisions) Act 1997 (IT(TP)A) for 20XX income year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a XXXXX Trust.

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

You are engaged in multiple business activities.

On XX XXXX 20XX, you purchased a vehicle for $XXX,XXX.

On XX XXXX 20XX, you first used the vehicle for income producing activity.

The Gross vehicle mass (GVM) of the vehicle is X,XXX kilograms.

The Kerb weight of the vehicle is X,XXX kilograms.

The vehicle has a seating capacity of X passengers.

The vehicle has not been fitted with any modifications in the 20XX income year including modifications for transporting disabled persons.

You use the vehicle primarily for business purposes only.

Your private travel will be limited, and you record this using a logbook.

You plan for the GVM upgrade in 20YY financial year.

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

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(3)(b)

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 202XX-XX financial year is $XX,XXX.

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

Temporary full expensing is a government initiative that supports businesses and encourages investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use for a taxable purpose.

To be an eligible entity for temporary full expensing you are carrying on a business and your aggregated turnover must be below $5 billion.

For the 2020-21, 2021-22 and 2022-23 income years, an eligible entity can claim in its tax return a deduction for the business portion of the cost of:

•         eligible new assets first held, first used or installed ready for use for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2023

•         eligible second-hand assets (the criteria to satisfy will not be outlined here for the purposes of this ruling).

•         improvements incurred between 7.30pm AEDT on 6 October 2020 and 30 June 2023 to

o   eligible assets

o   existing assets that would be eligible assets except that they are held before 7.30pm AEDT on 6 October 2020

•         eligible assets of small business entities using the simplified depreciation rules and the balance of their small business pool.

Note: you can make a choice to opt out of temporary full expensing for an income year on an asset-by-asset basis if you are not using the simplified depreciation rules.

Passenger vehicle used commercially due to particular vehicle requirements and usage

Under fringe benefits law, a car benefit will be an exempt benefit if:

a)    the car is a taxi, panel van or utility designed to carry a load of less than one tonne, or other 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:

•         work-related travel of the employee and

•         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 principle purpose of the design of the car is relevant.

Taxation Determination TD 94/19 Fringe benefits tax: is the method outlined in Taxation Ruling MT 2024 appropriate for determining whether a vehicle, other than a dual or crew cab, is 'designed for the principle purpose of carrying passengers' and thereby ineligible for the work-related use exemption available under subsection 8(2) of the Fringe Benefits Tax Assessment Act 1986? (TD 94/19) provides guidance for determining the principle purpose for which a car was designed. For dual or crew cabs vehicles, the method outlined in Miscellaneous Tax Ruling MT 2024 applies. However, for other vehicles, the Commissioner advises that regard should be had to factors including, but not limited to, the following:

•         the appearance and presentation of the vehicle,

•         any relevant promotional literature

•         the emphasis evident in marketing

•         the vehicle's specifications

•         load carrying capacity

•         passenger carrying capacity.

Application to your circumstances

Your vehicle meets the definition of a car under section 995-1 of the ITAA 1997. The design and specification of the vehicle suggests, it still carry a load of less than 1 tonne and fewer than 9 passengers.

TD 94/19 addresses when a FBT exemption can be applied to other commercial vehicles than a dual or crew cab. The factors outlined in TD 94/19 are taken into consideration to determine if commercial vehicles such as taxis, panel vans or utilities designed to carry a load of less than one tonne, or other road vehicle not designed for the principal purpose of carrying passengers qualify for the FBT exemption. Firstly, in your case, we are addressing the application of income tax law to your circumstances. Secondly, your vehicle is not a commercial vehicle similar to a taxi, panel van or utility. Your vehicle is designed to carry passengers. Your vehicle satisfies the income tax definition of a car. Therefore, the car limit would apply to your vehicle.

For the purposes of temporary full expensing, you would not be entitled to claim the full cost of your vehicle. You would apply the car limit. As such the first element of the cost base for the vehicle will be reduced to the car limit (after applying section 40-225 and Subdivision 27-B) of $60,733 for the 2021-22 income year for the purposes of Division 40 of the ITAA 1997 and the application of the temporary full expensing measures.

Question 2

Are you entitled to claim the entire purchase price of a passenger vehicle with a 1-tonne payload used commercially under the temporary full expensing (TFE) measures of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) for 2022 income year?

Detailed reasoning

Section 40-230 of ITAA 1997 outline the car limit is applied to first element costs of the car in the financial year in which you start to hold the car if the cost exceeds the car limit.

Section 40-190 of the ITAA 1997 states the second element is worked out after you start to hold the depreciating asset, a car in this case. The second element, among other things, can be the amount you have taken to have paid for economic benefit that has contributed to bringing the asset to its present condition and location from time to time since you start to hold the asset.

In accordance with paragraph 40-160(3)(b) of the Income Tax (Transitional Provisions) Act 1997 you can immediately deduct the business portion of the costs of improvement (the second element) if the asset's start time occurred in an earlier year between 7.30pm AEDT on 6 October 2020 and 30 June 2023 for eligible assets.

Application to your circumstances

The proposed modifications to your vehicle are planned to take place in the 20XX-XX income tax year. The modifications are regarded as second element costs in accordance with section 40-190 of the ITAA 1997. Because the modifications are second element costs, they have no impact on the car limit. The car limit is only concerned with first element costs.

Based on the information you have provided it appears your Toyota Landcruiser LC300 Sahara Wagon meets the criteria for an eligible asset. You state you first used the vehicle on 22 March 20XX. You plan to make vehicle modifications during the 20XX-XX income tax year. As a second element, if you pay for the modifications in the 20XX-XX income tax year you can claim the full taxable or business portion of the modification expense under the temporary full expensing measures.

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