Income tax: the meaning of cost price of trading stock for motor vehicle dealers of new vehicles

This Ruling explains the meaning of cost price of trading stock under subsection 31(1) of the Income Tax Assessment Act 1936 for motor vehicle dealers of new vehicles.

In particular, the Ruling examines various additional charges imposed by manufacturers and/or their associated companies on the purchase of new vehicles by dealers and whether these charges should be included in cost price.

The Ruling does not apply to second hand vehicles, nor does it apply to demonstration stock discussed in Taxation Ruling IT 2648.

The cost price of new motor vehicles to dealers includes all charges made by manufacturers and/or their associated entities in the normal course of operation in bringing the motor vehicles to their location and condition for sale. It does not matter how the charges are described or invoiced or what structures are used in the conduct of the business.

This Ruling applies to years commencing both before and after its date of issue. However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 21 and 22 of Taxation Ruling TR 92/20).

Where a motor vehicle dealer has been valuing new motor vehicles other than in accordance with this Ruling, the dealer should, subject to the limitations in section 170 concerning the amendment of assessments, request adjustments to the stock valuations for earlier years and adopt the correct method for valuation in the future.

Section 28 requires that the value of new motor vehicles on hand at the end of a year of income ('the current year') be compared with the value of the new motor vehicles at the beginning of the current year to ascertain whether an amount is assessable under subsection 28(2) or deductible under subsection 28(3). For this purpose, the value of the new motor vehicles at the beginning of the current year is to be the same as that taken into account at the end of the previous income year (section 29). If, in relation to the first income year in which this Ruling is applied, an incorrect value was taken into account in the previous year, the opening value for the current year is to be the value that would have been taken into account at the close of the previous year if this Ruling had applied to that previous year.

It has been well settled by the courts that in determining cost price for manufacturers indirect costs are to be included. See Australasian Jam Co. Pty Ltd v. FC of T (1953) 88 CLR 23; 10 ATD 217, Philip Morris Ltd v. FC of T 79 ATC 4352 10 ATR 44.

Nothing contained in those decisions would lead to the conclusion that the courts would not also look to retailers adopting a basis where direct and indirect costs of acquisition are also included in cost price.

In Taxation Board of Review Decision 12 CTBR Case 19 the Board held that a narrow interpretation should not be given to the phrase 'cost price', appearing in subsection 31(1) of the Income Tax Assessment Act, and that it did not mean the 'invoice price' or 'purchase price', i.e. the price as between vendor and purchaser, apart from charges for freight, delivery, duty etc. The substance of the Board's view is that 'cost price' means the cost of the stock to the taxpayer, including charges in getting it into its existing condition, and bringing it to the place where it is 'on hand'.

For some time manufacturers of motor vehicles have adopted a practice of dividing the total of charges levied upon the sale of new vehicles into two categories. These charges are sometimes referred to as either first and second schedule expenses or column one and two expenses. Some manufacturers may use other terminology in explaining this practice but in this Ruling we will refer to the charges as first and second schedule expenses.

First schedule expenses include the basic charge by manufacturers for a new motor vehicle. Second schedule expenses include additional charges levied by manufacturers or their associated entities. The practice of separating charges grew out of the need to determine a uniform sales tax value for new motor vehicles.

Over the years different amounts have been included as second schedule expenses. In earlier years the second schedule expenses included such items as windscreens and seat belts because of the different sales tax rates applicable to those items. More recently second schedule expenses included such items as: Dealer Margins Dealer Delivery Charges Marketing and Sales Incentives Transportation and Freight Costs Warranty Charges Administration Charges National Advertising Government Concessions

These charges are levied on an individual vehicle basis though the rate at which some charges are calculated may vary depending on the volume of motor vehicles purchased by a particular retailer. In making the charges it is common for both first and second schedule expenses for each vehicle to appear on the one invoice.

Motor vehicle dealers will sometimes transfer or exchange motor vehicle stock with other dealers. On these occasions the second schedule expenses are transferred with the vehicle.

It has been argued that these expenses are associated with the dealer agreements and should be treated as management or administration charges. This office considers that expenses of this nature are so closely aligned or connected with the motor vehicle that they are direct or indirect costs of its acquisition. The existence of separate contracts or arrangements regarding the payment of first and second schedule expenses does not alter the nature of the charges.

A number of motor vehicle dealers are structured and operate as two separate legal entities, usually a wholesale company and a retail company. It is understood that some of these dealers have separate contracts for the billing of first schedule expenses to one entity and the billing of second schedule expenses to the other entity. While some dealers have direct reimbursement arrangements between these entities others do not.

Subsection 31(1) provides for taxpayers a choice of valuation method for trading stock on hand. The section does not provide a value nor does it imply that a method is available if the value is otherwise incapable of being ascertained. (See St Hubert's Island Pty Ltd 138 CLR 210 78 ATC 4104) Nevertheless, this Office will accept a value for cost price for motor vehicle dealers using a multiple entity structure provided both first and second schedule expenses are included in the valuation.

Compact Cars Pty Ltd, a dealer of the new Xcusey range of motor vehicles, takes delivery of a number of these new vehicles. For each vehicle an invoice is received. The typical invoice shows the total amount owed broken into two columns: Column One Base model price $10,600 Column Two Dealer delivery charge $540 National advertising program $500 Factory incentive scheme $400 Assuming there are no other costs involved in getting the vehicles to their showroom location and condition then the cost price of each motor vehicle as trading stock would be $12,040 ie. both column one and two charges.

The Larger-Than-Life Motors group of companies operate as Larger-Than-Life Motors Wholesale Pty Ltd (Wholesale) and Larger-Than-Life Motors Retail Pty Ltd (Retail) and market the Suntan range of motor vehicles. When the Larger-Than-Life Motors group orders a Suntan vehicle Wholesale takes delivery of the vehicle and receives an invoice for a base model price. Around the same time Retail receives an invoice titled Service Fees calculated by reference to a number of standard charges per vehicle delivered.

Should any company which has this stock on hand at the end of the year of income wish to adopt the cost price method for trading stock valuation it will be necessary for each vehicle to be valued on the base model price charge plus the 'Service Fees' occasioned by the delivery of that vehicle.