Car Expenses - '12 per cent of original value' method - cost of car more than car depreciation limit

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) where the taxpayer travelled more than 5000 business kilometres during the year of income?

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

The taxpayer uses their car for business purposes.

The taxpayer bought their new car on 1 July 2000 for $60 000.

During the 2000-01 income year the taxpayer travelled in excess of 5000 business kilometres in the car.

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 Subdivision 28-D 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 the 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 5000 business kilometres in an income year, or would have travelled more than 5000 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).

The taxpayer's car has travelled in excess of 5000 business kilometres in the income year. Therefore, 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% * $55 134** = $6616 ** 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. The car depreciation limit for the 2000-01 year of income is $55 134 (subsection 42-80(3) of the ITAA 1997).