Deductions and expenses - car expenses - input tax credits

Is the taxpayer required under section 27-5 of the Income Tax Assessment Act 1997 (ITAA 1997) to reduce their deduction for car expenses by the amount of the GST input tax credits relating to those expenses?

Yes, the taxpayer is required under section 27-5 of the ITAA 1997 to reduce their deduction for car expenses by the amount of the GST input tax credits relating to those expenses

The taxpayer runs a business that is registered for GST purposes.

The taxpayer uses their car for more than 5000 business kilometres.

The taxpayer is entitled to an input tax credit in relation to some of the car expenses.

The taxpayer chooses to claim car expenses using the 'one third of actual expenses' method.

Subsection 7-1(2) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that entitlements to input tax credits arise on creditable acquisitions and creditable importations.

A creditable acquisition is made under section 11-5 of the GST Act if: • the taxpayer acquires anything solely or partly for a creditable purpose; and • the supply of the thing to the taxpayer is a taxable supply; and • the taxpayer provides, or are liable to provide consideration for the supply; and • the taxpayer is registered or required to be registered.

As the taxpayer is registered for GST, the car expenses incurred by the taxpayer are creditable acquisitions which gives rise to an entitlement to an input tax credit.

Section 28-12 of the ITAA 1997 provides that a deduction for car expenses can be made by using one of four methods. The 'one-third of actual expenses' method is contained in Subdivision 28-E of the ITAA 1997.

Section 28-13 of the ITAA 1997 provides that 'car expenses' means a loss or outgoing to do with a car, or operating a car.

Section 27-5 of the ITAA 1997 provides that a deduction cannot be claimed for a loss or outgoing to the extent that the loss or outgoing includes an amount relating to an input tax credit to which the taxpayer is entitled or a decreasing adjustment that the taxpayer has.

The effect of section 27-5 of the ITAA1997 is that where there is an entitlement to an input tax credit, a deduction which is otherwise allowable must be reduced by the amount of the input tax credit.

In calculating a deduction for car expenses using the 'one-third of actual expenses' method, the taxpayer must reduce the total car expenses by any input tax credits to which the taxpayer is entitled to claim. The taxpayer would then be entitled to a deduction for one-third of that net amount under section 28-12 of the ITAA 1997.