Issue
Do registration, insurance and brokerage amounts paid by the taxpayer as lessor form part of the second element of cost of a motor vehicle under section 40-190 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. These amounts do not form part of the second element of cost of a motor vehicle under section 40-190 of the ITAA 1997.
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).
Section 40-190 of the ITAA 1997 provides that the second element of cost is worked out after you start to hold the asset and includes, generally, the amount you are taken to have paid under section 40-185 of the ITAA 1997 for each economic benefit that has contributed to bringing the asset to its present condition and location.
An asset's condition refers to its general form, state or order and is represented by all of the economic benefits embodied in the asset. The registration, insurance and brokerage amounts are paid after the taxpayer starts to hold the car. The brokerage fee is for the sourcing of a finance provider and is not an amount paid for an economic benefit embodied in the car and so would not form part of the second element of cost.
Paragraph 2.90 of the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Act 2001 discusses the application of section 40-220 of the ITAA 1997 which reduces cost by any portion that is not of a capital nature. The paragraph contains an example that refers to the treatment of amounts for registration and insurance for a car. It notes that, while it could be argued that these amounts could be for an economic benefit that contributes to the asset's present condition, the expenditure is not capital or capital in nature and so would be excluded from cost.
Therefore amounts paid for registration, insurance and brokerage are not included in the car's second element of cost under section 40-190 of the ITAA 1997.