LCT and Determinations of the Principal Purpose of a Vehicle
The Australian Taxation Office (ATO) has released a conclusive decision regarding the luxury car tax (LCT) scheme, which clarifies the method for determining a vehicle’s primary intent. LCT may be applicable to the purchase or import of a car if its LCT value surpasses the relevant LCT threshold. By LCT regulations, a motor vehicle is classified as a car if it is created to carry a load that is under 2 tonnes and has no more than 8 passengers, or if it is a limousine.
However, LCT is not applicable, if the vehicle:
- is a commercial vehicle, and
- is specifically designed to carry passengers.
No matter whether the car is a commercial vehicle or used for carrying passengers is determined depending on the design of the car, rather than how an operator is likely to use the car in practice. According to the ATO, the following factors need to be considered in checking the purpose of a vehicle:
- The presentation and appearance of the vehicle
- Any appropriate promotional literature
- The specifications of the vehicle
- The Australian Design Rules (ADRs) apply to the vehicle, as per the Vehicle Standard 2005 vehicle category classification
- The carrying capacity
- The passengers carrying capacity.
The initial design of the vehicle and any changes that cannot be easily undone must be taken into consideration when determining the vehicle’s primary purpose. In a series of examples, the ATO examines modified automobiles to determine whether the changes would support the claim that the vehicle’s primary use is not for passenger transportation.
Additionally, the determination details how the ATO will use its compliance resources in this area. In general, the ATO anticipates that the following body shapes are unlikely to be found in commercial vehicles:
- Station wagons;
- Passenger sedans;
- Off-road passenger wagons;
- People movers;
- Sports utility vehicles.
The ATO would consider the agreement high-risk if automobiles with these body types were delivered for a sum above the LCT threshold without LCT being paid.
On the other hand, low-risk alternatives would be considered for the provision of trucks and cargo or delivery vans without LCT.
The ATO won’t apply compliance resources to utility vehicles (such as single cab, dual cab, and extra can utility vehicles) if the passenger carrying capacity is less than 50% of the load carrying capacity. The number of seating positions is multiplied by 68kg to get the passenger carrying capacity.
Timing of Employment Income
According to the AAT, employment income will be derived for tax purposes when the payment is received, irrespective of when the work was done or when the entitlement to the payment emerged. The case involved a taxpayer who was operating overseas as a non-resident when they were liable to get a ‘performance bonus’ from their employer. The employer couldn’t pay the bonus to the taxpayer at that time. The amount was paid in instalments when the taxpayer came back to Australia and became an Australian resident for tax purposes.
When the bonus was derived was the main point of contention between the taxpayer and the ATO. The bonus would not have been subject to Australian taxation if it had been received while the taxpayer was still a non-resident. This is due to the fact that non-residents are often only taxed in Australia on income that is sourced there.
Although there may be exceptions, most employment revenue is derived from the location of the labour itself.
The AAT referred to the High Court ruling in the Carden case, which held that when choosing the right basis for recognising income, it is essential to consider whether the method accurately reflects the taxpayer’s true income and determine whether income or gains have been returned to the taxpayer in a realised or immediately realisable form.
The application of these concepts has resulted in the general treatment of employee compensation as having been derived upon receipt. TR 98/1 offers guidance in this area and states that even when pay, wages, or other employment compensation pertain to a previous or future income period, they are assessable on receipt.
The taxpayer was subject to worldwide income tax because the bonus payments were made while they were residents of Australia. The fact that the revenue stemmed from labour done while the taxpayer was a non-resident overseas did not shield the bonus from Australian taxation.
Taxi Industry Compensation Payments
Some state and territory governments have started paying compensation to Taxi licence holders because of the adverse effects of these changes. The AAT determined in this instance that a compensation payment granted to a taxpayer who possessed three taxi licences was not income in the conventional sense.
The Victorian Taxi Reform Fairness Fund awarded the taxpayer money in recognition of the severe financial hardship they had to endure as a result of changes made to the Victorian tax system, including the lower value of taxi licences and lower revenue as a result of more intense competition.
The ATO paid particular attention to the fact that the payment was partially made in conjunction with lower income when establishing the payment’s tax treatment.
If compensation payments are made to make up for lost earnings or profits, they are typically taxed on the revenue account.
However, the AAT deemed that the payment was financial assistance that was paid for the relief of unfair financial hardship. In a nutshell, according to the AAT, the payment must not be categorised as ordinary income. For every practitioner, it is vital to keep in mind that this case dealt with payments made by following a specific Victorian scheme. Payments made under different schemes may have other tax implications.
Interest Expenses Relating to a Scam
As per AAT, the taxpayer was not allowed to claim deductions for interest incurred on money borrowed from business associates or friends because there was not enough connection with the income-producing activities of a taxpayer. According to the taxpayer, the money he borrowed from friends and business partners was for a casino junket enterprise. The taxpayer asserted that he anticipated receiving assessable income from this activity, and at first glance, it seemed as though the business was doing well. The casino junket scheme, however, turned out to be a fraud in the end.
Despite ceasing to physically pay interest on the loans, the taxpayer continued to claim interest deductions, claiming that the costs had already been paid and had a sufficient relationship to the creation of assessable income. While the taxpayer admitted that some of the money was used for personal expenses, he presented a report that suggested this was just a modest usage of the money.
The commissioner rejected the deductions on the basis that:
- Some expenses were not incurred
- There was a lack of connection with producing assessable income
- Some borrowed funds were used for personal purposes.
LCT and GST for Cars Displayed in a Museum
The Full Federal Court has found that the car museum owner didn’t have the cars solely as trading stock even though the cars were for sale in the ordinary course of business. It meant that the taxpayer couldn’t avoid GST credit limit applications for luxury cars and couldn’t escape LCT on the cars.
The taxpayer operated and owned a car museum, which was advertised to the public as a tourist attraction. The museum hosted other events and charged admission fees. The taxpayer’s controller was a licensed car dealer and he gave proof that the museum was a marketing strategy to boost the sales of cars. The cars in the museum were categorised as trading stock in taxpayer’s tax and accounting records. The taxpayer was registered for LCT and quoted when getting and importing cars.
The main issue at hand was whether the cars were obtained solely to be used as trading stock or if they had another intended purpose. The Commissioner did not dispute that the cars were indeed held as trading stock but argued that they were also intended for other uses. The Full Federal Court was divided on the matter, but the majority agreed with the Commissioner and the primary judge that the cars were not exclusively used as trading stock. The Court held that for the cars to be considered as trading stock, they must be used exclusively for that purpose. The Court based its decision on the extensive promotion of the museum and the commercial nature of its operations. They found that the cars were not simply being displayed as if in a showroom for sale, but were being presented in a manner that went beyond that.
Non-Arm’s Length Income of an SMSF
Although the AAT determined that the parties involved did not negotiate on equal terms, the NALI regulations were not invoked. Therefore, the income generated was not subject to penalty taxes. The SMSF served as the primary beneficiary/unit holder and received interest income from a lending agreement in which funds were provided by various related entities (including a unit trust in which the SMSF held units, as well as two companies) before being lent to unrelated parties.
The primary factor in the decision was that even though the related parties were not involved with each other at arm’s length, the income which was received by the SMSF as the result of the arrangement was not above the amount that the SMSF might have expected to receive if those parties had been involving with each other at arm’s length.
From the private lending space, the support of expert witnesses, indicating that the arrangement as structured was in commercial arrangements, was essential. The expert witness of the Commissioner was deemed less knowledgeable in relevant areas, having experience primarily in the context of larger lenders and banks.