Interest deduction: purchase of a motor vehicle costing more than the cost limit for depreciation purposes - 'one third of actual expenses' method

Can a taxpayer, who uses the 'one-third of actual expenses' method under Subdivision 28-E of the Income Tax Assessment Act 1997 (ITAA 1997) to calculate their car expense deduction, include the full amount of interest incurred on a loan to purchase a car, the cost of which exceeds the car limit set under section 40-230 of the ITAA 1997?

Yes. A taxpayer, who uses the 'one-third of actual expenses' method under subdivision 28-E of the ITAA 1997 to calculate their car expense deduction, can include the full amount of interest incurred on a loan to purchase a car, the cost of which exceeds the car limit set by section 40-230 of the ITAA 1997.

The taxpayer requires a car to earn their assessable income.

They purchased a car for $95,000.

They borrowed $80,000 to purchase the vehicle.

The car is not used for private purposes.

The taxpayer wants to use the 'one third of actual expenses' method to calculate their car expense deduction.

Division 28 of the ITAA 1997 sets out 4 methods of calculating the deduction allowable under section 8-1 of the ITAA 1997 for car expenses.

One of these methods is the 'one-third of actual expenses' method. This allows a taxpayer to claim one-third of each car expense.

A car expense is defined in subsection 28-13(1) of the ITAA 1997 as a loss or outgoing to do with a car and includes interest paid on a loan used to purchase a car.

Under subsection 28-70(2) of the ITAA 1997, the car expense must qualify as a deduction under some provision of the ITAA 1997, other than Division 28. If only part of the expense qualifies for a deduction, then only one-third of that part is allowable.

Interest on an amount borrowed to purchase a car that is used in the production of the taxpayer's assessable income would be an allowable deduction under section 8-1 of the ITAA 1997.

Section 40-230 of the ITAA 1997 places a limit on the first element of the cost of a car for the purposes of claiming a deduction for depreciation but it has no application to section 8-1 of the ITAA 1997. As such, it cannot be applied to limit the amount of deduction allowable under section 8-1 of the ITAA 1997 for interest paid.

As such, under section 28-70 of the ITAA 1997 the taxpayer is entitled to claim one-third of the total interest expense as a deduction.

subsection 28-13(1)

section 28-70

subsection 28-70(2)

section 40-230