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This was published 16 years ago
Inputs, outputs, interest, depreciation: take a luxury drive through our tax laws
To say tax law is complicated is an understatement. To try to apply logic to tax rules and regulations, especially when it comes to motor vehicles, is an exercise in futility, writes Max Newnham.
I found this out recently after an article I did on claiming GST and tax deductions for luxury vehicles.
The confusion starts with the fact that there are two luxury car limits. The first applies to claiming input tax credits on the purchase of a car and is a GST-inclusive cost of up to $57,009. The second applies to the claim for depreciation on a luxury car, which is a GST-exclusive cost of up $57,009. This cost is calculated by deducting the maximum GST input tax credit claim of $5182 from the purchase cost.
It would be reasonable to think that if the Government wanted to limit the cost of a car for tax deduction purposes, the limit would apply to all costs including financing. But it is not the way our tax system works.
In my article I said the claim for both interest and leasing costs on a car costing more than the luxury cost limit were restricted to that limit. Not so. There is no limit on what can be claimed when financing the purchase of a car.
This leaves us with a tax system that on the one hand limits the tax deduction for the cost of a car, but on the other hand allows a full deduction for interest and insurance.
Andrew Gardiner, senior tax manager with the National Tax and Accountants Association, agrees the system is inconsistent: "Errors are consistently being made in relation to luxury car leases because there are fundamental differences between their GST and income tax treatment. People who attempt to apply commercial logic to these measures soon learn this is fraught with danger. Changes may be needed to improve consistency for income tax, depreciation and GST purposes."
The errors being made with luxury car leases are that people are claiming a tax deduction as a lease instead of treating them as a hire purchase contract, which is what should happen. Under hire purchase contracts and chattel mortgages there are two claims made for a vehicle: depreciation for the car's cost and interest for the finance.
For a lease there is normally only one deduction: the leasing cost. Effectively each lease payment combines the finance cost and the write-off of the purchase cost. To ensure taxpayers cannot claim a bigger deduction for writing off the cost of a car when using a lease, instead of the other finance methods available, finance companies must place realistic payout figures on lease contracts.
In other words under a lease contract the payout value of the car at the end of the lease must be close to market value.
With the purchase and finance of a car more than the luxury car limit, the method of finance is ignored.
For income tax, a lease must be treated like a hire purchase contract, so taxpayers must get a breakdown of principle and interest for the lease. They then claim the depreciation up to the luxury car limit and the interest cost each year.
The best way to explain all this is through an example. Bob the builder buys a BMW ute on July 1 for $110,000 using a chattel mortgage to finance the purchase. As the car is designed to carry less than one tonne in weight, and fewer than nine passengers, it is caught by the luxury car depreciation limit.
The ute is only driven for business purposes and is therefore 100 per cent claimable for income tax and GST purposes. On his September BAS Bob can only claim $5183 of input tax credits included in the cost of the car.
After the input tax credit refund, the net cost of the ute is $104,817. For depreciation purposes the deduction is limited to an after-GST cost of $57,009. This will mean in the first year Bob can claim depreciation of $7126 under the straight-line method or $10,689 using the reducing balance method.
In the first 12 months the interest charged on the chattel mortgage was $7000. Despite limits on his claim for input tax credits and depreciation, Bob can claim 100 per cent of the interest as well as the full cost of insuring the ute.