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$18,000 limit on depreciation of motor vehicles for income tax purposes

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TREASURER [RELEASE v - — — EMBARGO ( ί . / ο . η



In the Budget Speech I announced that for: income tax purposes

depreciation on motor cars and station wagons ordered after

21 August 1979 would be limited to $18,000. Balancing adjustments

on disposal of the vehicle would be calculated by reference

to a deemed cost of $18,000. The $18,000 limit would be indexed


The Government has examined representations on the effects of

the measure, and has decided that it should remain .unchanged,

subject to one modification.

The Government has decided that there should be transitional

arrangements to meet the situation of dealers and importers who, at Budget day, had luxury cars on hand or were irrevocably committed by firm orders placed on or before that date to buy such cars. Accordingly it has decided that the $18,000

limit will not apply in respect of motor vehicles whether new or second-hand that, as at 21 August 1979, were owned as trading stock of a vendor and were either on hand at the vendor's

premises or were in course of delivery there. Nor will the limit apply where an irrevocable order had been placed with a

supplier or manufacturer as at 21 August 1979. The limit will

apply, however, where a dealer or importer who had placed such

an order and was permitted to withdraw from it subsequently renews the order.


This change will have no revenue effect in 1979-80 and

negligible revenue effects in subsequent years.

It is evident from representations which have been made to the

Government, as well as some of the public comment on the measure,

that there is some misunderstanding of the way the limit is

to operate and the effects it will have. ;

The following comments clarify some of the aspects on which

some misunderstanding has been evident.

The limit will not affect in any way the tax position of people who buy vehicles for non-business use, and who would therefore not be claiming depreciation either under the present law or under the amendment which is to be made to the law.

The limit applies only to depreciation deductions for income tax purposes, and applies to both new and second-hand vehicles.

It does not prevent a vehicle costing more than $18,000 from being leased; it merely means that depreciation allowed to the lessor is limited to $18,000, and that this will be reflected in

increased lease charges irrespective of the accounting method

used by the lessor to calculate its taxable income. Nor does

the limit involve disallowance of deductions for any of the lease rentals paid for vehicles costing more than $18,000. .

The owner of a vehicle, whether he leases it out or uses it

himself, will still be able to choose either the prime cost or the diminishing balance method of depreciation and apply it

to the $18,000 limit.

Contrary to the impression which some people apparently gained,

the balancing adjustment cannot recoup the whole of the depreciation deductions previously allowed except in circumstances

where the present law would also have that effect, i.e. where a vehicle bought for business use holds its value and is subsequently


resold at its original cost or more, as is not uncommon with

some quality cars. Under those circumstances the balancing

adjustment on disposal already recoups the depreciation

deductions previously claimed, and will still do so under the

amendment, and the limit will.have no effect on net deductions by the owner.

Upon disposal of a vehicle, the balancing adjustment will be determined by comparing the depreciated value (equal to the

deemed cost of $18,000 less the depreciation allowable) with

a deemed disposal value (equal to actual disposal price reduced in the ratio which the deemed cost of $18,000 bears to the actual cost). For example, if a car which cost $40,000 was resold for $24,000 after 3 years, depreciation claimed over the

3 years (if the prime cost method were used) would be $8,100 (i.e. 15 per cent of $18,000 in each of the 3 years). The balancing adjustment would be equal to the deemed disposal

price of $10,800 (i.e. ' ^q ' qqq x 24,000) , less the depreciated value of $9,900 (i.e. $18,000 less depreciation of $8,100),

leaving a balancing charge of $900 to be included in assessable

income. That would still leave $7,200 of depreciation deductions which were not recouped by the balancing charge.

CANBERRA 16 October 1979