Product Ruling

PR 2013/14

Income tax: tax consequences of entering into a Toyota Finance Australia Business Vehicle Loan with a Guaranteed Future Value

• Please note that the PDF version is the authorised version of this ruling.

No guarantee of commercial success

The Commissioner does not sanction or guarantee this product. Further, the Commissioner gives no assurance that the product is commercially viable, that charges are reasonable, appropriate or represent industry norms, or that projected returns will be achieved or are reasonably based.

Potential participants must form their own view about the commercial and financial viability of the product. The Commissioner recommends a financial (or other) adviser be consulted for such information.

This Product Ruling provides certainty for potential participants by confirming that the tax benefits set out in the Ruling part of this document are available , provided that the scheme is carried out in accordance with the information we have been given, and have described below in the Scheme part of this document. If the scheme is not carried out as described, participants lose the protection of this Product Ruling.

Terms of use of this Product Ruling

This Product Ruling has been given on the basis that the entity or the entities that applied for the Product Ruling, and their associates, will abide by its strict terms of use. Any failure to comply with the terms of use may lead to the withdrawal of this Product Ruling.

What this Ruling is about

1. This Product Ruling sets out the Commissioner's opinion on the way in which the relevant provisions identified in the Ruling section apply to the defined class of entities who take part in the scheme to which this Ruling relates. All legislative references in this Ruling are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated.

2. In this Product Ruling, the scheme involves the execution of a Business Vehicle Loan (BVL) with a Guaranteed Future Value (GFV), offered by Toyota Finance Australia Limited (TFA) with respect to new Toyota and Lexus Vehicles (Vehicles).

3. This Product Ruling does not:

•

address the tax consequences to arise in respect of the execution of a BVL that does not include a GFV;

•

apply to a Term Purchase Agreement, including a Term Purchase Agreement with a GFV;

•

apply to a Consumer Fixed Rate Loan, including a Consumer Fixed Rate Loan with a GFV;

•

address the deductibility of credit fees and charges payable by a Customer under a BVL;

•

address the tax consequences to arise in the event a Customer chooses to either refinance the final payment payable under a BVL, or vary the terms of their contract; and

•

address whether the scheme constitutes a financial arrangement for the purposes of Division 230 (Taxation of financial arrangements).

Class of entities

4. This part of the Product Ruling specifies which entities can rely on the Ruling section of this Product Ruling and which entities cannot rely on the Ruling section. In this Product Ruling, those entities that can rely on the Ruling section are referred to as the Customer.

5. The class of entities who can rely on the Ruling section of this Product Ruling consists of those entities who:

•

execute the relevant agreement mentioned in paragraph 16 of this Product Ruling on or after 1 August 2012 and on or before 30 June 2016;

•

have an intention of staying in the scheme until the scheduled end date of the BVL (that is, being a party to the BVL until its term expires); and

•

acquire a Vehicle for the sole purpose of using it in deriving assessable income from their business or income producing activities and do not use the Vehicle for private or domestic purposes.

6. The class of entities who can rely on the Ruling section of this Product Ruling does not include entities who:

•

execute the relevant agreement mentioned in paragraph 16 of this Product Ruling before 1 August 2012 or after 30 June 2016;

•

intend to terminate their involvement in the scheme prior to its completion;

•

acquire a Vehicle for a purpose other than of using it in deriving assessable income from their business or income producing activities or use the Vehicle for private or domestic purposes;

•

execute a BVL without a GFV;

•

execute a Term Purchase Agreement or Consumer Fixed Rate Loan; or

•

are subject to Division 230 in respect of this scheme. Division 230 will generally not apply to individuals, unless they have made an election for it to apply to them.

Superannuation Industry (Supervision) Act 1993

7. This Product Ruling does not address the provisions of the Superannuation Industry (Supervision) Act 1993 (SISA). The Commissioner gives no assurance that the scheme is an appropriate investment for a superannuation fund. The trustees of superannuation funds are advised that no consideration has been given in this Product Ruling as to whether investment in this scheme may contravene the provisions of SISA.

Qualifications

8. The class of entities defined in this Product Ruling may rely on its contents provided the scheme actually carried out is carried out in accordance with the scheme described in paragraphs 16 to 26 of this Ruling.

9. If the scheme actually carried out is materially different from the scheme that is described in this Product Ruling, then:

•

this Product Ruling has no binding effect on the Commissioner because the scheme entered into is not the scheme on which the Commissioner has ruled; and

•

this Product Ruling may be withdrawn or modified.

Date of effect

10. This Product Ruling applies prospectively from 1 August 2012. It therefore applies only to the specified class of entities that enter into the scheme from 1 August 2012 until 30 June 2016, being its period of application. This Product Ruling will continue to apply to those entities even after its period of application has ended for the scheme entered into during the period of application.

11. However the Product Ruling only applies to the extent that there is no change in the scheme or in the entity's involvement in the scheme.

Changes in the law

12. Although this Product Ruling deals with the income tax laws enacted at the time it was issued, later amendments may impact on this Product Ruling. Any such changes will take precedence over the application of this Product Ruling and, to that extent, this Product Ruling will have no effect.

13. Entities who are considering participating in the scheme are advised to confirm with their taxation adviser that changes in the law have not affected this Product Ruling since it was issued.

Note to promoters and advisers

14. Product Rulings were introduced for the purpose of providing certainty about tax consequences for entities in schemes such as this. In keeping with that intention the Commissioner suggests that promoters and advisers ensure that participants are fully informed of any legislative changes after the Product Ruling has issued.

Ruling

15. Subject to paragraph 3 and the assumptions in paragraph 26 of this Ruling:

(a)

Interest incurred by a Customer under a BVL which includes a GFV will be deductible under section 8-1 in the income year incurred.

(b)

A Customer who acquires a Vehicle using a BVL which includes a GFV is entitled to capital allowance deductions under section 40-25.

(c)

The BVL is not a limited recourse debt, as defined in section 243-20. Division 243 will therefore not apply in respect of a Customer under a BVL which includes a GFV.

(d)

Provided the scheme ruled on is entered into and carried out as described in this Ruling, the anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) will not apply to a Customer.

Scheme

16. The scheme that is the subject of this Ruling is identified and described in the following documents:

•

application for a Product Ruling as constituted by documents and information received on 23 March 2012, 13 February 2013 and 5 March 2013;

•

Business Vehicle Loan Standard Terms and Conditions received on 13 February 2013;

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Loan Offer - Toyota Access Business Vehicle Loan received on 5 March 2013; and

•

Loan Offer - Lexus Ownership Solutions Business Vehicle Loan received on 17 June 2013.

17. For the purposes of describing the scheme to which this Ruling applies, there are no other agreements, whether formal or informal, and whether or not legally enforceable, which a Customer, or any associate of a Customer, will be a party to, which are a part of the scheme. Capitalised terms have the meaning provided in the BVL.

18. All Australian Securities and Investments Commission (ASIC) requirements are, or will be, complied with for the term of the agreements.

Overview

19. As part of its business of offering a range of business vehicle finance, TFA offers some of its Customers registered for GST a GFV feature in its standard BVL for new Vehicles. The GFV feature is not offered in relation to Vehicles other than new Vehicles.

20. The BVL is comprised of the Business Vehicle Loan Standard Terms and Conditions Booklet containing the standard terms and conditions for a BVL and the Loan Offer - Toyota Access Business Vehicle Loan or the Loan Offer - Lexus Ownership Solutions Business Vehicle Loan containing the details of the loan. Under the terms of the BVL:

•

the Credit Provider (TFA) provides an Amount of Credit to fund the Customer's purchase of a Vehicle, as well as the credit fees and charges payable by the Customer, as the Borrower, to the Credit Provider;

•

interest accrues daily at a fixed rate set by a process of negotiation between the relevant dealer that TFA appoints to originate finance on its behalf and the Customer, and is payable by the Customer in arrears;

•

the Customer has legal title to the Vehicle from the time of its acquisition; and

•

the Credit Provider holds a mortgage over the Vehicle financed, securing all amounts payable by the Customer under the BVL.

21. Customers have the following choices at the end of the term of the BVL (that is, when the final payment is due):

•

keep the Vehicle by paying the final payment in cash from their own resources;

•

trade-in the Vehicle with a dealer and paying out the BVL with all or part of the sale proceeds from the trade-in;

•

request that TFA refinance the final payment under the BVL; and

•

as a result of the GFV feature, sell the Vehicle to the Purchaser (the Credit Provider or an entity nominated by the Credit Provider) for a GST inclusive amount equal to the GFV, subject to kilometres travelled and fair wear and tear of the Vehicle.

22. The final payment required to be made by a Customer who has selected the GFV feature under the BVL (the Last Repayment) is set at the GFV. The GFV is based on an assessment by TFA of a number of factors, including the term of the BVL and the Contract Usage during the contract term (as nominated by the Customer), expected fair wear and tear and the anticipated costs of disposal of the Vehicle at the end of the contract term. The GFV is set at the beginning of the term and fixed for the duration of the BVL.

23. If the Vehicle at the Appraisal date is not in good repair and working order (Fair Wear and Tear excepted) and/or has exceeded the Contract Usage such that it does not meet the Standard, but not so far below the Standard that the Credit Provider may inform the Customer that they may not sell the Vehicle to the Purchaser for the GFV, the GFV will be reduced by the Excess Usage Adjustment. The reduced GFV is the Adjusted GFV.

24. The GFV (or Adjusted GFV) is payable to the Customer in consideration for their sale of the Vehicle to the Purchaser and will be applied by the Purchaser against the Last Repayment. Where the Adjusted GFV is less than the Last Repayment, the Customer will be required to pay the balance outstanding to the Credit Provider out of their own funds.

25. When the Customer has agreed to sell the Vehicle to the Purchaser for the GFV (or Adjusted GFV) and, if necessary has paid to the Credit Provider any amount equal to the difference between the Adjusted GFV and the Last Repayment, the Credit Provider will immediately release its mortgage over the Vehicle and title to the Vehicle will then pass unencumbered to the Purchaser. Where, on the other hand, the Customer elects not to sell the Vehicle to the Purchaser for the GFV (or Adjusted GFV), the Customer is required to satisfy all their obligations under the BVL (without utilisation of the GFV mechanism). Where the Customer has satisfied all of their obligations under the BVL, the Credit Provider will then release its mortgage over the Vehicle.

Assumptions

26. This Ruling is made on the basis of the following assumptions:

(a)

the Customers are Australian residents for taxation purposes;

(b)

the Customers acquire a Vehicle for the sole purpose of using it in deriving assessable income from their business or income producing activities and do not use the Vehicle for private or domestic purposes;

(c)

the Customers do not acquire a Vehicle as an item of trading stock;

(d)

the Customers do not use the 'one-third of actual expenses' method, the 'cents per kilometre' method or the '12% of original value' method for the Vehicle;

(e)

all dealings between the Customer, TFA, the Credit Provider, the Purchaser and a relevant dealer will be at arm's length; and

(f)

the scheme will be executed in the manner described in the Scheme section of this Ruling and the scheme documentation referred to in paragraph 16 of this Ruling.

Commissioner of Taxation
26 June 2013

Appendix 1 - Explanation

Deductibility of interest: Section 8-1

27. Expenditure, including interest on money borrowed, is deductible under section 8-1 if its essential character is that of expenditure that has a sufficient connection with the operations or activities which more directly gain or produce a taxpayer's assessable income, provided that the expenditure is not of a capital, private or domestic nature.

28. The essential character of interest on money borrowed is a question of fact to be determined by reference to the objective circumstances of the use to which the borrowed funds are put by the borrower (Federal Commissioner of Taxation v. Munro (1926) 38 CLR 153).

29. Interest paid on a borrowing used to acquire an income producing asset is generally treated as deductible under section 8-1 where it is expected that assessable income would be derived from the investment. Interest incurred by a Customer under a BVL which includes a GFV to finance the acquisition of a Vehicle used solely in the Customer's business or income producing activities therefore has sufficient connection with the gaining of assessable income to be deductible under section 8-1 in the year in which it is incurred.

Deductibility of capital expenditure: Division 40

30. Division 40 provides a deduction for the decline in value of a depreciating asset held to the extent the asset is used for a taxable purpose (section 40-25).

31. A Vehicle is a depreciating asset. As the legal owner of the Vehicle from the time of its acquisition, a Customer under a BVL which includes a GFV is entitled to deduct an amount equal to the decline in value for an income year of the Vehicle it holds during that year pursuant to item 10 of the table in section 40-40.

32. Pursuant to the assumption at paragraph 27(b) of this Product Ruling, no part of the Vehicle's decline in value will be attributable to the Customer's use of the Vehicle for a purpose other than a taxable purpose (as defined in subsection 40-25(7)) and the deduction available under subsection 40-25(1) will therefore not be reduced pursuant to subsection 40-25(2).

Limited recourse debt: Division 243

33. Division 243 provides that an amount must be included in your assessable income where, on the termination of a limited recourse debt (as defined in section 243-20), capital allowance deductions that have been obtained in respect of expenditure that is funded by the limited recourse debt are excessive having regard to the amount of unpaid debt.

Part IVA - anti-avoidance

34. Provided that the scheme ruled on is entered into and carried out as disclosed in this Ruling, it is accepted that the scheme is an ordinary commercial transaction and Part IVA of the ITAA 1936 will not apply.

Appendix 2 - Detailed contents list

35. The following is a detailed contents list for this Ruling:

© AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA

You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Not previously issued as a draft

References

ATO references:
NO 1-4GDK9BT

Subject References:
financial products
interest
product rulings
public rulings
taxation administration

Legislative References:
ITAA 1936 Pt IVA
ITAA 1997
ITAA 1997 8-1
ITAA 1997 Div 40
ITAA 1997 40-25
ITAA 1997 40-25(1)
ITAA 1997 40-25(2)
ITAA 1997 40-25(7)
ITAA 1997 40-40
ITAA 1997 Div 230
ITAA 1997 Div 243
ITAA 1997 243-20
SISA 1993
TAA 1953

Case References:
Federal Commissioner of Taxation v. Munro
(1926) 38 CLR 153