Issue
Do registration, insurance and brokerage amounts paid by the taxpayer as lessor form part of the first element of cost of a motor vehicle under section 40-180 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Registration, insurance and brokerage amounts do not form part of the first element of cost of a motor vehicle under section 40-180 of the ITAA 1997 as they are not amounts the taxpayer is taken to have paid to hold the motor vehicle.
Facts
The taxpayer is a finance provider and leases cars to lessees under arm's length commercial arrangements in the normal course of its business operations. The arrangements are not a hire purchase agreement as defined in subsection 995-1(1) of the ITAA 1997.
The taxpayer is the legal owner and holder of a car it leases to a lessee under item 10 of the table in section 40-40 of the ITAA 1997. The leased car is registered (with the State Government body that administers and levies motor vehicle registrations) in the name of the lessee. The taxpayer finances amounts for the registration and insurance of the leased car for the first year. Subsequent amounts for registration and insurance during the lease period are met by the lessee. The taxpayer also finances a once-only brokerage fee paid to a finance broker for sourcing the lease arrangement with the taxpayer.
Reasons for Decision
The cost of a depreciating asset consists of both the first and second elements (section 40-175 of the ITAA 1997). The first element of cost is worked out as at the time when the asset starts to be held (section 40-180 of the ITAA 1997) while the second element is worked out after that time (section 40-190 of the ITAA 1997).
The first element of cost is, in certain circumstances, an amount specified in the table in subsection 40-180(2) of the ITAA 1997. Otherwise it is the amount taken to have been paid under section 40-185 of the ITAA 1997.
No item in the table in subsection 40-180(2) of the ITAA 1997 applies to the taxpayer's circumstances. The amount the taxpayer is taken to have paid to hold the motor vehicle must, therefore, be worked out under section 40-185 of the ITAA 1997. Item 1 of the table in subsection 40-185(1) of the ITAA 1997 includes in cost an amount you pay to hold a depreciating asset.
An amount is paid to hold an asset if it is for, or incidental to, the acquisition of the asset. The taxpayer began to hold the car when it became its legal owner. The taxpayer pays an amount to become the legal owner of the car, which it then provides to the lessee under a lease agreement.
Registration is paid to permit use of the car on the road for a period of time. Similarly, insurance payments secure comprehensive motor vehicle insurance for a period of time. The brokerage fee is paid for sourcing of a finance provider.
Amounts paid for the registration, insurance and brokerage are not amounts paid for the taxpayer's acquisition of the car, and lack sufficient connection with the acquisition of the car to be regarded as incidental to its acquisition.
Amounts paid for the registration, insurance and brokerage are therefore not amounts the taxpayer is taken to have paid to hold the motor vehicle under section 40-185 of the ITAA 1997. These amounts do not form part of the first element of cost under section 40-180 of the ITAA 1997.