Over the past more than 30 years there have been many examples of inconsistencies and inequities within income tax legislation. A prime example for small business owners was the original restriction placed on them making tax-deductible super contributions, which has now been corrected with the passing of the fairer superannuation system reforms.
An example of inconsistencies within the income tax system are the limits placed on the value of cars. To make sure that well-heeled tax payers did not get a tax advantage, by buying high-priced luxury cars, a limit was placed for depreciation purposes on the cost of cars.
![There's a limit for depreciation purposes on the cost of cars.](http://web.archive.org./web/20170802183842im_/https://www.fairfaxstatic.com.au/content/dam/images/g/v/i/h/h/e/image.related.articleLeadwide.620x349.gxma0x.png/1501485737812.jpg)
When the cost limit was introduced in the 1986 financial year the limit was $26,660. This limit has increased each year based on increases in the motor vehicle purchase subgroup of the consumer price index.
During the 1980s and 1990s, when the costs of cars was increasing more dramatically, the cost limit increased fairly rapidly up until 1997 to $55,134. Because of the reduction and removal of duties and tariffs on imported cars the car depreciation cost limit has increased to be only $57,581 for the 2018 year.
When a car is purchased that exceeds the cost limit depreciation can only be claimed on the car up to the value of the cost limit. For businesses registered for GST the applicable cost for a motor vehicle is the GST inclusive cost.
The inconsistency with regard to the car cost limit is that for depreciation purposes the $57,581 limit is the net after GST cost for depreciation calculation purposes, while for GST calculation purposes the $57,581 limit is the GST inclusive cost.
Q. The maximum GST credit on the purchase of cars – is it applicable to new cars, or is it applicable to both new and used?
A. The car cost limits apply to both new and used cars for both depreciation and GST input tax purposes. This means for GST purposes the maximum input tax credit that can be claimed for a car, that is used 100 per cent for business purposes, is $5234. This is calculated by dividing $57,466 by 11.
If a car was purchased for $62,815 the GST input tax credit claimable would be limited to the $5234, resulting in an after GST cost for the car at $57,581. For a small business this would result in a tax deduction, under the asset pooling provisions, of $8637 in the first year and $14,683 in the second year.
These depreciation tax deductions are based on 15 per cent of the $57,581 cost limit in the first year, and at 30 per cent of the reduced value of the car in the second year of $48,944. If a car is purchased for more than $62,815 the GST input tax credit limit is limited to the $52,234 and the depreciation cost is limited to $57,581 for both new and used cars.
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