Car Expenses - '12 per cent of original value' method - part year ownership

Can the taxpayer calculate their car expense deduction using the '12% of original value' method under Subdivision 28-D of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the taxpayer can calculate their car expense deduction using the '12% of original value' method under subdivision 28-D of the ITAA 1997.

A taxpayer uses their car for business purposes.

The taxpayer bought their new car on the 31 December 2000 for $60,000.

During the remainder of the financial year, the taxpayer travelled 3000 business kilometres.

Division 28 of the ITAA 1997 sets out the rules for working out a taxpayer's deductions for car expenses.

Section 28-12 of the ITAA 1997 states:

'(1) If you owned or leased a car or hired a car under a hire purchase agreement, you can deduct for the car's expenses an amount or amounts worked out using one of the four methods.

(2) You must use one of the 4 methods unless an exception applies. If you can't use any of the methods, you can't deduct anything for the car expenses.'

The four statutory methods of calculating deductions are: • 'cents per kilometre' method (Subdivision 28-C of the ITAA 1997) • '12% of original value' method (Subdivision 28-D of the ITAA 1997) • 'one-third of actual expenses' method (Subdivision 28-E of the ITAA 1997) • 'log book' method (Subdivision 28-F of the ITAA 1997).

Section 28-45 of the ITAA 1997 provides that under the '12% of original value' method a taxpayer can deduct 12% of the cost of the car when they acquired it or hired it under a hire purchase agreement, or 12% of its market value when they first began to lease it.

However the most that a taxpayer can deduct using this method is 12% of the car depreciation limit for the income year when they first used the car for any purpose (if they own it or are hiring it) or when they first began to lease it.

A taxpayer can only use the '12% of original value' method where they have travelled more than 5,000 business kilometres in a financial year, or would have travelled more than 5,000 business kilometres had they held the car for a full 12 months. Business kilometres are kilometres the car travelled in the course of producing the taxpayer's assessable income and a taxpayer can calculate them by making a reasonable estimate (section 28-50 of the ITAA 1997).

Whether a taxpayer would have travelled more than 5000 business kilometres, had they held the car for a full 12 months, can be calculated as follows:

(Number of business kilometres Travelled * 365) / Number of Days the Taxpayer owns the Car

If a taxpayer did not own or lease the car for the whole year, subsection 28-45 (3) of the ITAA 1997 provides that the taxpayer's deduction under the '12% of original value' method is calculated using the following formula:

Full Year Car Deduction * ([365 - the number of car - less days] / 365])

The full year car deduction is the amount the taxpayer would deduct if they had owned or leased the car for the whole income year. A car-less day is a day when a taxpayer did not own or lease the car.

Under the '12% of original value' method, the taxpayer does not need to substantiate the car expenses for their car (section 28-60 of the ITAA 1997).

The taxpayer travelled 3000 business kilometres from 31 December until the end of the income year. Therefore the number of business kilometres the taxpayer would have travelled during the income year is:

(3000 * 365) / 182

=6,016 business kilometres

Hence, the taxpayer is eligible to calculate their car expenses using the '12% of original value' method. The taxpayer is entitled to a deduction of:

(12% * $55134*) * ([365 - 183] / 365)

= $6,616 * (182 / 365)

= $3,299 • since the taxpayer's car cost $60,000 which is greater than the maximum car depreciation limit, the taxpayer is only entitled to a deduction of 12% of the car depreciation limit.