Income tax: can subsection 51(2A) of the Income Tax Assessment Act 1936 (the Act) operate to defer a tax deduction, available to a retail motor vehicle dealer, for second schedule charges incurred when acquiring new vehicle trading stock?

Yes. Subsection 51(2A) of the Act has the effect of deferring a deduction for expenditure incurred after 19 December 1991 in connection with the acquisition of stock until: (a) that stock has actually become trading stock on hand of the taxpayer; or (b) an amount has been included in assessable income as a result of the disposal of that stock by the taxpayer.

Second schedule charges incurred by a motor vehicle dealer, upon the acquisition of a new vehicle from the manufacturer/importer, are considered to be a component of cost price for the purposes of calculating the value of the item in terms of subsection 31(1) of the Act (see Draft Taxation Determination TD 94/D86).

Numerous motor vehicle dealerships involved in the distribution of new vehicles are structured on composite business lines, usually with separate wholesale and retail company. This structure was illustrated in the case of FC of T v. Suttons Motors (Chullora) Wholesale Pty Ltd 85 ATC 4398; (1985) 16 ATR 567.

Some dealers, when the purchase of a new vehicle is completed, have an arrangement with the manufacturer/importer for the invoicing of the first schedule charges to the wholesale company. Around the same time an invoice for the second schedule charges is forwarded to the retail company. In the event of a retail sale of a new motor vehicle the vehicle is disposed of by the wholesale company to the retail company and then by the retail company to the purchaser.

In these circumstances subsection 51(2A) may apply to defer a deduction to a dealer's retail company for second schedule charges incurred subsequent to 19 December 1991. A deduction is only allowable once the conditions explicit in subsection 51(2A) have been satisfied.